<PAGE> 1
File Nos. 33-31675 and 811-5979
As filed with the Securities and Exchange Commission on June 16, 1995.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. / /
Post-Effective Amendment No. / /
(Check appropriate box or boxes)
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199-7603
------------------------------------------------------------------------
(Address of principal executive office) Zip Code
(617) 375-1700
------------------------------------------------------------------------
(Registrant's Telephone Number, including Area Code)
With a copy to:
---------------
Thomas H. Drohan Jeffrey N. Carp, Esq.
John Hancock Advisers, Inc. Hale and Dorr
101 Huntington Avenue 60 State Street
Boston, MA 02199 Boston, MA 02109
------------------------------------------------------------------------
(Name and address of agent for service)
Approximate Date of Proposed Public Offering: As soon as practicable
after the effectiveness of the registration statement.
No filing fee is required because an indefinite number of shares have
previously been registered pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. This Registration Statement relates to shares
previously registered on Form N-1A (File No. 811-5979)
It is proposed that this filing will become effective on July 16, 1995,
pursuant to Rule 488 under the Securities Act of 1933.
<PAGE> 2
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
CROSS-REFERENCE SHEET
Items Required by Form N-14
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
1. Beginning of Registration COVER PAGE OF REGISTRATION
Statement and Outside Front STATEMENT; FRONT COVER PAGE
Cover Page of Prospectus OF PROSPECTUS
2. Beginning and Outside Back TABLE OF CONTENTS
Cover Page of Prospectus
3. Synopsis Information and SUMMARY; RISK FACTORS AND
Risk Factors SPECIAL CONSIDERATIONS
4. Information About the INFORMATION CONCERNING THE
Transaction MEETING; PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF
REORGANIZATION; CAPITALIZATION
5. Information About the PROSPECTUS COVER PAGE: INTRO-
Registrant DUCTION; SUMMARY; BUSINESS OF
CALIFORNIA PORTFOLIO; BUSINESS
OF CALIFORNIA TAX-FREE INCOME
FUND
6. Information About the PROSPECTUS COVER PAGE: INTRO-
Company Being Acquired DUCTION; SUMMARY; BUSINESS OF
CALIFORNIA PORTFOLIO; BUSINESS
OF CALIFORNIA TAX-FREE INCOME
FUND
7. Voting Information PROSPECTUS COVER PAGE; NOTICE
OF SPECIAL MEETING OF SHARE-
HOLDERS; SUMMARY; INFORMATION
CONCERNING THE MEETING
8. Interest of Certain Persons NONE
and Experts
9. Additional Information NOT APPLICABLE
Required for Reoffering by
Persons Deemed to be Under-
writers
<PAGE> 3
PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
- -------- ------------ -----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. Additional Information ADDITIONAL INFORMATION
About the Registrant ABOUT CALIFORNIA TAX-FREE INCOME
FUND
13. Additional Information About ADDITIONAL INFORMATION
the Company Being Acquired ABOUT CALIFORNIA PORTFOLIO
14. Financial Statements ADDITIONAL INFORMATION ABOUT
CALIFORNIA TAX-FREE INCOME FUND;
ADDITIONAL INFORMATION ABOUT
CALIFORNIA PORTFOLIO; PRO FORMA
COMBINED FINANCIAL STATEMENTS
PART C
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Item No. Item Caption
- -------- ------------
15. Indemnification INDEMNIFICATION
16. Exhibits EXHIBITS
17. Undertakings UNDERTAKINGS
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<PAGE> 4
John Hancock Funds Letterhead
July 21, 1995
TAX-EXEMPT SERIES FUND - CALIFORNIA PORTFOLIO
Dear Fellow Shareholder:
As you may know, the John Hancock family of funds has recently expanded in
size with the addition of the former Transamerica Funds. This presents an
opportunity to combine the money management efforts serving your investment
with those of a similar mutual fund. For this reason, we are proposing a
merger of your fund, John Hancock Tax-Exempt Series Fund - California
Portfolio, into the John Hancock California Tax-Free Income Fund Fund.
YOUR BOARD OF TRUSTEES BELIEVES THAT THIS MERGER IS APPROPRIATE GIVEN THAT
BOTH FUNDS PURSUE A SIMILAR INVESTMENT OBJECTIVE.
Please take the time to read the enclosed materials and cast your vote on the
enclosed proxy card. Please vote promptly. It is extremely important, no
matter how many shares you own.
Comparative performance information, investment objectives and policies
are described at length for both funds in the enclosed Proxy Statement. We
believe that this merger will benefit you in two ways:
1. LOWER FUND EXPENSES. Your Trustees firmly believe that combining these
two funds may benefit shareholders by allowing the Fund to capitalize on
expected economies of scale in investment research, operations and other
important areas. By creating a larger combined fund, the merger should lead
to reduced expenses and, ultimately, lower costs for you.
2. INCREASED INVESTMENT DIVERSIFICATION. By combining both funds' assets
into a single portfolio, the California Tax-Free Income Fund will be able to
achieve greater diversification.
YOUR VOTE IS IMPORTANT!
At a special meeting of shareholders to be held on September 8, 1995 at 9:00
a.m., you will be asked to approve the merger of the Tax-Exempt Series Fund -
California Portfolio into the California Tax-Free Income Fund Fund. Your Board
of Trustees has unanimously approved the merger.
We urge you to exercise your right as a shareholder and to vote by completing,
signing and returning the enclosed proxy ballot form to us immediately.
Your prompt response will help avoid the necessity for additional mailings at
your Fund's expense. For your convenience, we have provided a postage-paid
envelope.
If you have questions, please call your Financial Advisor or a John Hancock
Funds Customer Service Representative at 1-800-225-5291, Monday through Friday
between 8:00 a.m.and 8:00 p.m. Eastern time. Thank you for your prompt
attention to these important matters.
Sincerely,
Edward J. Boudreau, Jr.
Chairman and CEO
Enclosure
<PAGE> 5
CALIFORNIA PORTFOLIO
101 Huntington Avenue
Boston, Massachusetts 02199
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 8, 1995
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of California Portfolio ("California Portfolio"), a series of John
Hancock Tax-Exempt Series Fund, a Massachusetts business trust, will be held at
101 Huntington Avenue, Boston, Massachusetts 02199 on Friday, September 8, 1995
at 9:00 a.m., Boston time, and at any adjournment thereof, for the following
purposes:
1. To consider and act upon a proposal to approve an Agreement and Plan of
Reorganization (the "Reorganization Agreement") between John Hancock
Tax-Exempt Series Fund, on behalf of California Portfolio, and John Hancock
California Tax-Free Income Fund ("California Fund"), providing for
California Fund's acquisition of all California Portfolio's assets in
exchange solely for: (a) California Fund's assumption of California
Portfolio's liabilities and (b) the issuance of California Fund Class A
shares to California Portfolio for distribution to its shareholders; and
2. To consider and act upon such other matters as may properly
come before the Meeting or any adjournment of the Meeting.
The Board of Trustees has fixed the close of business on July 14, 1995
as the record date for determination of shareholders who are entitled to notice
of and to vote at the Meeting and any adjournment of the Meeting.
If you cannot attend the Meeting in person, please complete, date and
sign the enclosed proxy and return it to John Hancock Investor Services
Corporation, 101 Huntington Avenue, Boston, Massachusetts 02199 in the enclosed
envelope. It is important that you exercise your right to vote. THE ENCLOSED
PROXY IS BEING SOLICITED BY THE BOARD OF TRUSTEES OF JOHN HANCOCK TAX-EXEMPT
SERIES FUND.
By order of the Board of Trustees,
THOMAS H. DROHAN, Secretary
Boston, Massachusetts
July 21, 1995
<PAGE> 6
CALIFORNIA PORTFOLIO
PROXY STATEMENT
______________________
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
PROSPECTUS
______________________
This Proxy Statement and Prospectus sets forth the informa-
tion you should know before voting on the proposed reorganization
of California Portfolio into John Hancock California Tax-Free
Income Fund ("California Fund"). California Portfolio is a series
of John Hancock Tax-Exempt Series Fund, a Massachusetts business
trust (the "Trust"). California Fund is a Massachusetts business
trust.
This Proxy Statement and Prospectus relates to Class A shares
of beneficial interest, $0.01 par value per share (collectively,
the "California Fund Class A Shares"), of California Fund which
will be issued in exchange for all of California Portfolio's
assets. In exchange for these assets, California Fund will also
assume all of the liabilities of California Portfolio. The
California Fund Class A Shares issued to California Portfolio for
distribution to California Portfolio's shareholders will have an
aggregate net asset value equal to the aggregate net asset value
of California Portfolio. The asset values of California Portfolio
and the California Fund Class A Shares will be determined at the
close of business (4:00 p.m. Eastern Time) on the Closing Date (as
defined below) for purposes of the proposed reorganization.
Following the receipt of California Fund Class A Shares (1)
California Portfolio will be liquidated, (2) the California Fund
Class A Shares will be distributed to California Portfolio's
shareholders pro rata in exchange for their shares of California
Portfolio and (3) California Portfolio will be terminated.
Consequently, California Portfolio shareholders will become
Class A shareholders of California Fund. These transactions are
collectively referred to in this Proxy Statement and Prospectus as
the "Reorganization." No Class B shares of California Fund will
be issued in the Reorganization.
The Reorganization is being structured as a tax-free reorga-
nization so that, in the opinion of tax counsel, no gain or loss
will be recognized by California Fund, California Portfolio or the
shareholders of California Portfolio. The terms and conditions of
<PAGE> 7
the Reorganization are more fully described in this Proxy
Statement and Prospectus, and in the Form of Agreement and Plan of
Reorganization that is attached as EXHIBIT A.
California Fund is a diversified open-end management in-
vestment company organized as a Massachusetts business trust in
1989. California Fund seeks to provide as high a level of income
exempt from both federal income taxes and California personal
income taxes as is consistent with preservation of capital.
The principal place of business of both California Portfolio
and California Fund is at 101 Huntington Avenue, Boston,
Massachusetts 02199. Their toll-free telephone number is
1-800-225-5291.
Please read this Proxy Statement and Prospectus carefully and
retain it for future reference. This Proxy Statement and Pro-
spectus, which is accompanied by the Prospectus of California Fund
dated May 1, 1995 (EXHIBIT B), sets forth information that you
should know before approving the Reorganization. The Prospectus
of California Portfolio dated January 1, 1995 is incorporated
herein by reference and is available, upon oral or written request
and at no charge, from California Portfolio.
A Statement of Additional Information dated July 16, 1995
relating to this Proxy Statement and Prospectus, and containing
additional information about each of California Fund and
California Portfolio, including historical financial statements,
is on file with the Securities and Exchange Commission ("SEC").
It is available, upon oral or written request and at no charge,
from California Fund. The Statement of Additional Information is
incorporated by reference into this Prospectus.
SHARES OF CALIFORNIA FUND ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER DEPOSITORY
INSTITUTION, AND THE SHARES OF CALIFORNIA FUND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Proxy Statement and Prospectus is July 16,
1995.
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<PAGE> 8
TABLE OF CONTENTS
Page
INTRODUCTION.............................................
SUMMARY..................................................
RISK FACTORS AND SPECIAL CONSIDERATIONS .................
INFORMATION CONCERNING THE MEETING.......................
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION.
CAPITALIZATION...........................................
COMPARATIVE PERFORMANCE INFORMATION......................
BUSINESS OF CALIFORNIA FUND..............................
General............................................
Investment Objective and Policies..................
Portfolio Management...............................
Trustees...........................................
Investment Adviser and Distributor.................
Expenses...........................................
Custodian and Transfer Agent.......................
California Fund Class A Shares.....................
Purchase of California Fund Class A Shares.........
Redemption of California Fund Class A Shares.......
Dividends, Distributions and Taxes.................
BUSINESS OF CALIFORNIA PORTFOLIO.........................
General............................................
Investment Objective and Policies..................
Portfolio Management...............................
Trustees...........................................
Investment Adviser and Distributor.................
Expenses...........................................
Custodian and Transfer Agent.......................
California Portfolio Shares........................
Purchase of California Portfolio Shares............
Redemption of California Portfolio Shares..........
Dividends, Distributions and Taxes.................
EXPERTS..................................................
AVAILABLE INFORMATION....................................
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<PAGE> 9
EXHIBITS
A - Form of Agreement and Plan of Reorganization by and be-
tween John Hancock Tax-Exempt Series Fund, on behalf of
California Portfolio, and John Hancock California Tax-
Free Income Fund (attached hereto).
B - Prospectus of John Hancock California Tax-Free Income
Fund, dated May 1, 1995 (attached hereto).
C - Annual Report to Shareholders of John Hancock California
Tax-Free Income Fund, dated August 31, 1994 (included
herewith).
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<PAGE> 10
PROXY STATEMENT AND PROSPECTUS
FOR SPECIAL MEETING OF SHAREHOLDERS OF
CALIFORNIA PORTFOLIO
TO BE HELD ON SEPTEMBER 8, 1995
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connec-
tion with the solicitation of proxies by the Board of Trustees of
the Trust (the "Board of Trustees"). The proxies will be voted at
the Special Meeting of Shareholders (the "Meeting") of California
Portfolio to be held at 101 Huntington Avenue, Boston,
Massachusetts 02199 on Friday, September 8, 1995 at 9:00 a.m.,
Boston time, and at any adjournment or adjournments of the
Meeting. The purposes of the Meeting are set forth in the
accompanying Notice of Special Meeting of Shareholders.
This Proxy Statement and Prospectus incorporates by reference
the prospectus of California Portfolio, dated January 1, 1995 (the
"California Portfolio Prospectus"), and includes the prospectus of
California Fund, dated May 1, 1995 (the "California Fund
Prospectus"). The Annual Report to Shareholders of California
Fund, dated August 31, 1994, is included with this Proxy Statement
and Prospectus. These materials will be mailed to shareholders of
California Portfolio on or after July 21, 1995. California
Portfolio's most recent Semi-Annual Report to Shareholders was
previously sent to shareholders on or about April 30, 1995.
As of June 30, 1995, shares of beneficial interest of
California Portfolio were outstanding.
All properly executed proxies received by management prior to
the Meeting, unless revoked, will be voted at the Meeting
according to the instructions on the proxies. If no instructions
are given, shares of California Portfolio represented by proxies
will be voted FOR the proposal (the "Proposal") to approve the
Agreement and Plan of Reorganization (the "Agreement") between the
Trust, on behalf of California Portfolio, and California Fund.
The Board of Trustees knows of no business that will be
presented for consideration at the Meeting other than what is
mentioned in the immediately preceding paragraph. If other
business is properly brought before the Meeting, proxies will be
voted according to the best judgment of the persons named as
proxies.
In addition to the mailing of these proxy materials, proxies
may be personally solicited by Trustees, officers and employees of
California Portfolio; by personnel of California Portfolio's
<PAGE> 11
investment adviser, John Hancock Advisers, Inc., California
Portfolio's transfer agent, John Hancock Investor Services
Corporation ("Investor Services"); by broker-dealer firms; or by a
professional solicitation organization, in person or by telephone.
California Portfolio and California Fund (each, a "Fund" and
collectively, the "Funds") will each bear its own fees and
expenses in connection with the Reorganization discussed in this
Proxy Statement and Prospectus.
The information concerning California Fund in this Proxy
Statement and Prospectus has been supplied by California Fund.
The information regarding California Portfolio in this Proxy
Statement and Prospectus has been supplied by the Trust.
SUMMARY
The following is a summary of certain information contained
elsewhere in this Proxy Statement and Prospectus. The summary is
qualified by reference to the more complete information contained
in this Proxy Statement and Prospectus, and in the Exhibits at-
tached and included with this document. Please read this entire
Proxy Statement and Prospectus carefully.
Reasons for the Proposed Reorganization
The Trust's Board of Trustees has determined that the
proposed Reorganization is in the best interests of California
Portfolio and its shareholders. In making this determination, the
Trustees considered several relevant factors, including (1) the
fact that the investment objectives and policies of California
Portfolio and California Fund are generally similar, (2) the
likelihood that the Reorganization will result in improved
economies of scale and a corresponding decrease in the expenses
payable by California Portfolio and, indirectly, its shareholders
(without giving effect to the voluntary expense limitations
currently in effect for both Funds) and (3) the fact that
combining the Funds' assets into a single portfolio will enable
California Fund to achieve greater diversification than California
Portfolio is now able to achieve. The Trust's Board of Trustees
believes that the California Fund Class A Shares received in the
Reorganization will provide existing California Portfolio share-
holders with substantially the same investment advantages that
they currently enjoy at a comparable level of risk. For a more
detailed discussion of the reasons for the proposed
Reorganization, see "Proposal to Approve the Agreement and Plan of
Reorganization--Reasons For The Proposed Reorganization."
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<PAGE> 12
<TABLE>
THE FUNDS' EXPENSES
Both Funds are subject to various fees and expenses. The table
set forth below shows the operating expenses of shares of California
Portfolio and Class A shares of California Fund. The table also shows
the pro forma operating expenses of Class A shares of California Fund,
which assume that the proposed reorganization took place on December
31, 1994. All data reflect current fees and expenses, including
temporary agreements by the Adviser to limit both Funds' expenses
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of net assets)
California
California Fund Class A Pro
Portfolio Shares Forma
---------- ------------ ------
<S> <C> <C> <C>
Management fee*..................... 0.17% 0.41% 0.41%
12b-1 Fee........................... 0.30% 0.15% 0.15%
Other expenses*..................... 0.23% 0.19% 0.19%
---- ---- ----
Total Fund operating expenses*...... 0.70% 0.75% 0.75%
<FN>
--------------------------
* Expenses shown reflect voluntary and temporary agreements by
the Adviser to limit both Funds' expenses. Without these
limitations, the expense categories as a percentage of
average net assets would be: California Portfolio:
management fee--0.50%; and total operating expenses--1.05%;
California Fund Class A shares: management fee--0.55%; and
total operating expenses--0.89%; Pro forma: management fee--
0.55%; and total operating expenses--0.89%.
</TABLE>
If the proposed Reorganization is consummated, the actual
total operating expenses of California Fund may vary from the pro
forma operating expenses indicated in the above table and
footnote.
THE FUNDS' INVESTMENT ADVISER
John Hancock Advisers, Inc. (the "Adviser") acts as
investment adviser to both Funds.
BUSINESS OF CALIFORNIA PORTFOLIO
California Portfolio is a non-diversified series of the
Trust, an open-end management investment company organized as a
Massachusetts business trust in 1987. As of December 31, 1994,
California Portfolio's net assets were approximately $45,314,950
Dianne Sales-Singer is the portfolio manager of California
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<PAGE> 13
Portfolio. Ms. Sales-Singer will continue to serve as California
Portfolio's portfolio manager until the Reorganization.
BUSINESS OF JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
California Fund is a diversified, open-end management
investment company organized as a Massachusetts business trust in
1989. As of December 31, 1994, California Fund's net assets were
approximately $318,948,153. All investment decisions for
California Fund are made by the Adviser's fixed-income portfolio
management team. No single person is primarily responsible for
making recommendations to the team. The Adviser's fixed-income
portfolio management team will continue to make all investment
decisions for California Fund after the Reorganization.
COMPARISON OF THE INVESTMENT OBJECTIVES AND POLICIES OF CALIFORNIA
PORTFOLIO AND JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
CALIFORNIA PORTFOLIO. The investment objective of California
Portfolio is to provide current income that is excludable from
gross income for Federal income tax purposes and is exempt from
California personal income tax. At least 80% of the Portfolio's
net assets (taken at market value) consist of municipal
bonds and notes and other debt instruments, whose interest is
excludable from gross income for Federal income tax purposes and
is exempt from California personal income tax (collectively,
"California Tax-Exempt Securities"). California Portfolio may
also invest in U.S. Government securities, taxable commercial
paper, bank obligations, and cash equivalents and engage in
hedging and nonhedging transactions in futures contracts and
options on futures contracts.
CALIFORNIA FUND. The investment objective of California Fund
is to provide as high a level of current income exempt from both
Federal income taxes and California personal income taxes as is
consistent with preservation of capital. Under normal market
conditions, at least 80% of the Fund's total assets are invested
in California Tax-Exempt Securities. During normal investment
conditions, a substantial portion of California Fund's assets will
be invested in municipal bonds (without regard to maturities) and
other long-term obligations. California Fund may also invest in
U.S. Government securities, non-California tax-exempt securities,
commercial paper, bank obligations and repurchase agreements and
engage in hedging transactions in options on debt securities and
municipal bond indices, interest rate futures and options on such
futures.
California Fund's and California Portfolio's respective
investment objectives and 80% policies are designated as
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<PAGE> 14
fundamental and therefore cannot be changed without shareholder
approval.
In considering whether to approve the Reorganization, you
should consider the differences between the two Funds' investment
objectives and policies. For a discussion of the risks associated
with an investment in the Funds, see "Risk Factors and Special
Considerations."
<TABLE>
<CAPTION>
CALIFORNIA CALIFORNIA
PORTFOLIO FUND
<S> <C> <C>
Investment Objective is to provide Objective is to provide
Objective current income that is as high a level of
excludable from gross current income exempt
income for Federal income from Federal income
tax purposes and exempt taxes and California
from the personal income personal income taxes as
tax of California. is consistent with
California Portfolio preservation of capital.
seeks to provide the
maximum level of tax-
exempt income that is
consistent with
preservation of capital.
Primary At least 80% of At least 80% of
Investments California Portfolio's California Fund's total
net assets in the assets in the following
following California Tax- California Tax-Exempt
Exempt Securities: (1) Securities, with an
bonds rated at least A by emphasis on municipal
Standard & Poor's Ratings bonds and other long-
Group ("S&P"), Moody's term obligations: (1)
Investors Service, Inc. bonds rated within the
("Moody's") or Fitch four highest rating
Investors Service, Inc. categories by S&P,
("Fitch") (or unrated Moody's or Fitch; (2)
bonds issued by an issuer notes and commercial
with outstanding A-rated paper rated within the
bonds); (2) up to one- two highest rating
third of California categories by S&P,
Portfolio's total assets Moody's or Fitch; (3)
in bonds rated BBB, Baa, participation interests
BB or Ba by S&P, Moody's rated at least A (or
or Fitch or, if unrated, issued by an issuer with
determined by the Adviser outstanding A-rated
to be of comparable bonds) by S&P, Moody's
quality; (3) notes of or Fitch; and (4)
issuers having unrated bonds, notes and
</TABLE>
-5-
<PAGE> 15
<TABLE>
<S> <C> <C>
outstanding tax-exempt commercial paper
bonds rated not lower determined by the
than A, notes guaranteed Adviser to be of
by the U.S. Government or comparable quality to
rated MIG-1 or MIG-2 by permitted rated
Moody's or unrated notes investments. These
determined by the Adviser investments may include
to be of comparable variable rate and
quality; and (4) floating rate
commercial paper rated at obligations.
least A-2, P-2 or F-2 by
S&P, Moody's or Fitch or,
if unrated, determined by
the Adviser to be of
comparable quality.
These investments may
include variable rate and
floating rate
obligations.
Other California Portfolio may California Fund may
Investments purchase securities on a purchase securities on a
forward commitment or forward commitment or
when-issued basis and may when-issued basis and
invest in U.S. Government may invest in private
securities; private activity bonds and the
activity bonds and following short-term
taxable commercial paper instruments: (1) non-
meeting the above credit California tax-exempt
quality standards; securities; (2) U.S.
obligations of banks with Government securities;
at least $1,000,000,000 (3) taxable commercial
of assets; and cash paper meeting the above
equivalents, including credit quality
certificates of deposit, standards; (4)
bankers' acceptances and certificates of deposit
repurchase agreements. and bankers' acceptances
California Portfolio may of domestic banks with
also invest in illiquid, assets of $1,000,000,000
restricted and Rule 144A or more; and (5)
securities, subject to a repurchase agreements on
10% limit on illiquid securities in which
investments. This 10% California Fund may
limit is a fundamental invest (collectively,
policy and therefore "Short-Term
cannot be changed without Instruments").
shareholder approval. California Fund may also
invest in illiquid
securities and Rule 144A
restricted securities,
</TABLE>
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<PAGE> 16
<TABLE>
<S> <C> <C>
subject to a 10% limit
on illiquid investments
and a 10% limit on Rule
144A restricted
securities.
Permitted Futures contracts and Variable and floating
Investments in options on futures rate obligations. Also
Derivative contracts to hedge options on debt
Instruments against changes in securities and municipal
securities prices and bond indices, interest
interest rates or for rate and municipal bond
speculative purposes. index futures and
Also variable and options on such futures
floating rate to hedge against changes
obligations. in securities prices and
interest rates.
Diversification California Portfolio is California Fund is
and Industry not diversified, but does diversified and does not
Concentration not concentrate more than concentrate more than
25% of its assets in any 25% of its assets in any
one industry. one industry.
Temporary When the Adviser When the Adviser
Defensive determines that temporary determines that
Investents defensive investments are temporary defensive
appropriate, California investments are
Portfolio may invest up appropriate, California
to 50% of its net assets Fund may invest more
in cash, short-term U.S. than 20% of its assets
Government securities and in Short-Term
commercial paper and bank Instruments (as defined
obligations meeting the above), as long as at
requirements described the end of each quarter
above. of its taxable year,
these investments do not
exceed 50% of its
assets.
</TABLE>
FORM OF ORGANIZATION
California Portfolio is one of three separate series of the
Trust, a Massachusetts business trust. California Fund is a Mas-
sachusetts business trust. California Fund has authorized and
outstanding Class A and Class B shares. California Portfolio has
authorized and outstanding only one class of shares, which are
similar to Class A shares (but not so designated).
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<PAGE> 17
Each share of a Fund represents an equal proportionate
interest in the assets belonging to that Fund. The liabilities
attributable to California Portfolio are not charged against the
assets of any other series of the Trust. Shares of California
Portfolio and each other series of the Trust are voted separately
with respect to matters pertaining to California Portfolio or any
such series, but all shares vote together for the election of the
Trust's Trustees and the ratification of the Trust's independent
accountants.
The shares of each class of California Fund represent an
interest in the same portfolio of investments of California Fund.
Except as stated below, each class of California Fund has equal
rights as to voting, redemption, dividends and liquidation. Each
class bears different distribution and transfer agent fees and may
bear other expenses properly attributable to the particular class.
Class A and Class B shareholders of California Fund have exclusive
voting rights with regard to the Rule 12b-1 distribution plan
covering their class of shares.
Shares of California Portfolio and Class A shares of
California Fund are offered with a front-end sales charge. Shares
of California Portfolio are subject to a Rule 12b-1 fee of 0.30%
of the Portfolio's average daily net assets, of which up to 0.25%
of these average daily net assets is for service expenses and the
remainder is for distribution services. Class A shares of
California Fund are subject to a Rule 12b-1 fee of 0.15% of the
average daily net assets attributable to Class A shares.
As part of the Reorganization, Class A shares of California
Fund will be issued to California Portfolio and then distributed
by it to California Portfolio's shareholders.
SALES CHARGES AND DISTRIBUTION AND SERVICE FEES
California Portfolio imposes an initial sales charge on
shares at rates ranging from 4.50% to 0.00% of the amount invested
depending on the size of the purchase, the size of the purchaser's
existing investment, if any, at the time of the purchase, and the
participation of the shareholder in special purchase plans or
arrangements to purchase additional shares. California Fund
imposes such an initial sales charge on its Class A shares. For
Class A shares of California Fund and all shares of California
Portfolio, a CDSC of up to 1.00% is imposed on certain purchases
of shares without an initial sales charge and redeemed within one
year of purchase. An initial sales charge does not apply to
shares acquired through the reinvestment of dividends from net
investment income or capital gain distributions.
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Class A shares of California Fund acquired by California
Portfolio's shareholders pursuant to the Reorganization will not
be subject to any initial sales charge or CDSC. However, the CDSC
imposed upon certain redemptions within one year of purchase (re-
ferred to above) will continue to apply to the Class A shares of
California Fund issued in the Reorganization. The holding period
for determining the application of this CDSC will be calculated
from the date the California Portfolio shares were issued.
Both Funds have adopted distribution plans pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). Under its Rule 12b-1 plan,
California Portfolio may pay fees to John Hancock Funds, Inc.
("John Hancock Funds") to reimburse distribution and service
expenses incurred in connection with the Portfolio's shares.
These fees are payable at an annual rate of up to 0.30% of
California Portfolio's average daily net assets. Of the fee
payable by California Portfolio, up to 0.25% of net assets may be
for service expenses and the remainder will be for distribution
services.
Under its Rule 12b-1 Plan for Class A shares, California Fund
may pay fees to John Hancock Funds to reimburse distribution and
service expenses incurred in connection with the Fund's Class A
shares. These fees are payable at an annual rate of up to 0.15%
of California Fund's average daily net assets attributable to
California Fund's Class A shares.
The Board of Trustees of California Fund has determined that,
if the Reorganization is consummated, unreimbursed distribution
and shareholder service expenses originally incurred in connection
with California Portfolio's shares will be reimbursable under
California Fund's Rule 12b-1 Plan. As of December 31, 1994, the
unreimbursed distribution and shareholder service expenses for
Class A shares of California Fund and shares of California
Portfolio were $0 and $98,304, respectively. See "Unreimbursed
Distribution and Shareholder Expenses" below.
PURCHASES AND EXCHANGES
Shares of California Fund may be purchased through certain
broker-dealers and through John Hancock Funds at the public
offering price, which is based on the next determined net asset
value per share, plus any applicable sales charge. The minimum
initial investment in California Fund is $1,000 ($250 for group
investments and retirement plans). In anticipation of the
Reorganization, as of the Record Date, California Portfolio
stopped offering its shares to all investors other than existing
shareholders.
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Shareholders of California Fund may exchange their shares at
net asset value for shares of the same class of certain other
funds managed by the Adviser. Shareholders of California Portfolio
may exchange their shares at net asset value for Class A shares of
certain other funds managed by the Adviser. Shares of any fund
acquired in this manner will incur a CDSC, if still applicable,
upon redemption. The exchange privilege is available only in
those states where exchanges can be made legally.
DISTRIBUTION PROCEDURES
It is the policy of both Funds to pay dividends monthly from
net investment income. Each Fund also distributes annually all of
its other income, including both net realized short-term and long-
term capital gains, if any. California Portfolio will make,
immediately prior to the Closing Date (as defined below), a
distribution of all of its net income and net realized capital
gains, if any, not previously distributed.
REINVESTMENT OPTIONS
Unless an election is made to receive cash, the shareholders
of both Funds automatically reinvest all of their respective
dividends and capital gain distributions in additional shares.
These reinvestments are made at the net asset value per share and
are not subject to any sales charge.
REDEMPTION PROCEDURES
Shares of both Funds may be redeemed on any business day at a
price equal to the net asset value of the shares next determined
after receipt of a redemption request in good order, less any
applicable CDSC. Alternatively, shareholders of both Funds may
sell their shares through securities dealers, who may charge a
fee. Redemptions and repurchases of certain shares of California
Portfolio and California Fund are subject to the applicable CDSC.
Shares of California Portfolio may be redeemed up to and including
the Closing Date (as defined below).
REORGANIZATION
EFFECT OF THE REORGANIZATION. Pursuant to the terms of the
Agreement, the proposed Reorganization will consist of the
acquisition by California Fund of all the assets of California
Portfolio in exchange solely for (i) the assumption by California
Fund of all the liabilities of California Portfolio and (ii) the
issuance of California Fund Class A shares equal to the value of
these assets, less the amount of these liabilities (the
"California Fund Class A Shares"), to California Portfolio. As
part of the liquidation process, California Portfolio will
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immediately distribute to its shareholders these California Fund
Class A Shares in exchange for their shares of California
Portfolio. Consequently, shareholders of California Portfolio
will become Class A shareholders of California Fund. After
completion of the Reorganization, the existence of California
Portfolio will be terminated.
The Reorganization will become effective as of 5:00 p.m. on
the closing date, scheduled for September 8, 1995, or another date
on or before December 31, 1995 as authorized representatives of
the Funds may agree (the "Closing Date"). The California Fund
Class A Shares issued to California Portfolio for distribution to
California Portfolio's shareholders will have an aggregate net
asset value equal to the aggregate net asset value of California
Portfolio. For purposes of the Reorganization, the asset values
of California Portfolio and California Fund Class A Shares will be
determined as of the close of business (4:00 p.m. Eastern Time) on
the Closing Date.
The Trust's Board of Trustees, including the Trustees not
affiliated with either Fund, unanimously approved the
Reorganization, and determined that it was in the best interests
of California Portfolio and that the interests of California
Portfolio's shareholders would not be diluted as a result of the
Reorganization. Similarly, California Fund's Board of Trustees,
including the Trustees not affiliated with either Fund,
unanimously approved the Reorganization, and determined that it
was in the best interests of California Fund and that the
interests of California Fund's shareholders would not be diluted
as a result of the Reorganization. For a discussion of the
factors considered by the Trust's Board of Trustees, see "Proposal
to Approve the Agreement and Plan of Reorganization--Reasons for
the Proposed Reorganization."
TAX CONSIDERATIONS. The consummation of the Reorganization
is subject to the receipt of an opinion of Hale and Dorr, counsel
to the Funds, satisfactory to the Trust and California Fund and
substantially to the effect that:
(a) the acquisition by California Fund of all of California
Portfolio's assets solely in exchange for the issuance
of California Fund Shares to California Portfolio and
the assumption of all of California Portfolio's
liabilities by California Fund, followed by the
distribution by California Portfolio, in liquidation of
California Portfolio, of California Fund Shares to the
shareholders of California Portfolio in exchange for
their shares of beneficial interest of California
Portfolio and the termination of California Portfolio,
will constitute a "reorganization" within the meaning of
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Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and California Portfolio and
California Fund will each be "a party to a reorganiza-
tion" within the meaning of Section 368(b) of the Code;
(b) no gain or loss will be recognized by California
Portfolio upon (i) the transfer of all of its assets to
California Fund (in the exchange described above) and
(ii) the distribution by California Portfolio of
California Fund Class A Shares to California Portfolio's
shareholders;
(c) no gain or loss will be recognized by California Fund
upon the receipt of California Portfolio's assets in the
exchange described above;
(d) the basis of the assets of California Portfolio acquired
by California Fund will be, in each instance, the same
as the basis of those assets in the hands of California
Portfolio immediately prior to the transfer;
(e) the tax holding period of the assets of California
Portfolio in the hands of California Fund will, in each
instance, include California Portfolio's tax holding
period for those assets;
(f) the shareholders of California Portfolio will not
recognize gain or loss upon the exchange of all of their
California Portfolio shares for California Fund Class A
Shares as part of the Reorganization;
(g) the basis of the California Fund Class A Shares received
by California Portfolio shareholders in the
Reorganization will be the same as the basis of the
California Portfolio shares surrendered in exchange
therefor; and
(h) the tax holding period of the California Fund Class A
Shares received by California Portfolio shareholders
will include, for each shareholder, the tax holding
period for the California Portfolio shares surrendered
in exchange therefor, provided the California Portfolio
shares were held as capital assets on the date of the
exchange.
THE MEETING
TIME, PLACE AND DATE. The Meeting will be held on Friday,
September 8, 1995, at 101 Huntington Avenue, Boston, Massachusetts
02199, at 9:00 a.m. Boston time.
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RECORD DATE. The Record Date for determining shareholders
entitled to notice of and to vote at the Meeting is July 14, 1995.
VOTE REQUIRED FOR APPROVAL. Approval of the Agreement by the
shareholders of California Portfolio requires the affirmative vote
of not less than a "majority of the outstanding voting securities"
(as defined in the Investment Company Act) of California
Portfolio. The Reorganization does not require the approval of
California Fund's shareholders. See "Proposal to Approve the
Agreement and Plan of Reorganization--Voting Rights and Required
Vote."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Please see the California Fund Prospectus and the California
Portfolio Prospectus for a more complete description of each Fund's
investment objectives and policies, as well as their risk factors.
In deciding whether to approve the Reorganization, you should
consider the similarities and differences between the investment
objectives and policies and risk factors of the Funds. See
"Summary -- Comparison of the Investment Objectives and Policies
of California Portfolio and John Hancock California Tax-Free
Income Fund."
Both Funds are intended for long-term investors who can
accept the risks associated with investing primarily in fixed
income securities. If either California or any of its local
governmental entities is unable to meet its financial obligations,
the income derived by both Funds, their respective net asset
values and their respective abilities to preserve or realize
capital appreciation or maintain liquidity could be adversely
affected.
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<PAGE> 23
Because of its emphasis on bonds and other long-term
California Tax-Exempt Securities, California Fund may be more
susceptible than California Portfolio to the effects of changes in
interest rates. Generally, a rise in interest rates will result
in a decrease in the Fund's net asset value, while a decline will
result in an increase in the Fund's net asset value. However,
because California Fund is not authorized to invest in the lower
rated securities in which California Portfolio may invest (i.e.,
securities rated B or BB or Ba and comparable unrated securities),
California Fund will not be subject to the greater risks of these
securities.
INFORMATION CONCERNING THE MEETING
SOLICITATION, REVOCATION AND USE OF PROXIES
A majority of California Portfolio's shares that are
represented and entitled to vote at the Meeting will be a quorum
for the transaction of business. A California Portfolio
shareholder executing and returning a proxy has the power to re-
voke it at any time before it is exercised, by filing a written
notice of revocation with California Portfolio's transfer agent,
John Hancock Investor Services Corporation, P.O. Box 9116, Boston,
Massachusetts 02205-9116, or by returning a duly executed proxy
with a later date before the time of the Meeting. Any shareholder
who has executed a proxy but is present at the Meeting and wishes
to vote in person may revoke his or her proxy by notifying the
Secretary of the Trust (without complying with any formalities) at
any time before it is voted. Presence at the Meeting alone will
not serve to revoke a previously executed and returned proxy.
If a quorum is not present in person or by proxy at the time
any session of the Meeting is called to order, the persons named
as proxies may vote those proxies that have been received to ad-
journ the Meeting to a later date. If a quorum is present but
there are not sufficient votes in favor of the Proposal, the per-
sons named as proxies may propose one or more adjournments of the
Meeting to permit further solicitation of proxies with respect to
the Proposal. Any adjournment will require the affirmative vote
of a majority of the shares of California Portfolio represented in
person or by proxy at the session of the Meeting to be adjourned.
If an adjournment of the Meeting is proposed because there are not
sufficient votes in favor of the Reorganization, even though a
quorum is present at the Meeting, the persons named as proxies
will vote those proxies in favor of the Reorganization in favor of
adjournment, and will vote those proxies against the
Reorganization against adjournment.
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<PAGE> 24
RECORD DATE AND OUTSTANDING SHARES
Only California Portfolio shareholders of record at the close
of business on July 14, 1995 (the "Record Date") are entitled to
notice of and to vote at the Meeting and any adjournment of the
Meeting. At the close of business on June 30, 1995, shares
of beneficial interest of California Portfolio were outstanding.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF CALIFORNIA PORTFOLIO AND CALIFORNIA FUND
To the knowledge of the Trust, as of June 30, 1995, no person
owned of record or beneficially 5% or more of the outstanding
shares of beneficial interest of California Portfolio. To the
knowledge of California Fund, as of June 30, 1995, no person owned
of record or beneficially 5% or more of its outstanding Class A
shares of beneficial interest.
As of June 30, 1995, the Trustees and officers of the Trust,
as a group, owned in the aggregate less than 1% of the outstanding
shares of beneficial interest of California Portfolio. As of
June 30, 1995, the Trustees and officers of California Fund, as a
group, owned in the aggregate less than 1% of the outstanding
shares of beneficial interest of California Fund.
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
GENERAL
The shareholders of California Portfolio are being asked to
approve the Agreement, a copy which is attached as Exhibit A. The
Reorganization will consist of: (a) the transfer of all of
California Portfolio's assets to California Fund, in exchange
solely for the issuance of California Fund Class A Shares to
California Portfolio and the assumption of California Portfolio's
liabilities by California Fund, (b) the subsequent distribution by
California Portfolio, as part of its liquidation, of the
California Fund Class A Shares to California Portfolio's
shareholders and (c) the termination of California Portfolio's
existence. The California Fund Class A Shares issued upon the
consummation of the Reorganization will have an aggregate net
asset value equal to the aggregate value of the assets
attributable to California Portfolio's shares, less liabilities
attributable to California Portfolio's shares. As noted above,
the asset values of California Portfolio and California Fund will
be determined at the close of business (4:00 p.m. Eastern Time) on
the Closing Date for purposes of the Reorganization. See
"Description of Agreement" below.
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<PAGE> 25
Pursuant to the Agreement, California Portfolio will
liquidate and distribute the California Fund Class A Shares
received, as described above, pro rata to the shareholders of
record determined as of the close of regular trading on the New
York Stock Exchange on the Closing Date. The result of the
transfer of assets will be that California Fund will add to its
portfolio the net assets of California Portfolio. Shareholders of
California Portfolio will become Class A shareholders of
California Fund.
The Agreement and the Reorganization were unanimously ap-
proved by the Trust's Board of Trustees on behalf of California
Portfolio at a meeting held on May 1, 1995. The Agreement and the
Reorganization were unanimously approved by the Board of Trustees
of California Fund at a meeting held on May 16, 1995.
REASONS FOR THE PROPOSED REORGANIZATION
The Trust's Board of Trustees believes that the proposed
Reorganization will be advantageous to the shareholders of
California Portfolio in several respects. The Board of Trustees
considered the following matters, among others, in approving the
Proposal.
First, the Board of Trustees believes that it is not advan-
tageous to operate and market California Portfolio separately from
California Fund because their investment objectives and policies
are substantially identical. For a complete description of
California Fund's investment objective and policies, see the
California Fund Prospectus attached as EXHIBIT B.
Second, the Board of Trustees considered the fact that
California Portfolio is substantially smaller than California
Fund. The Board of Trustees determined that the existence of a
larger competing fund within the same fund complex and with
substantially identical investment characteristics is likely to
impede the marketing and asset growth of California Portfolio.
Third, the Board of Trustees considered that shareholders may
be better served by a fund offering greater diversification. As a
diversified fund under the Investment Company Act, California Fund
may not concentrate its assets in the securities of a single
issuer to the same extent as California Portfolio, which is not a
diversified fund under the Investment Company Act. In addition,
to the extent that the Funds' assets are combined into a single
portfolio and a larger asset base is created as a result of the
Reorganization, greater diversification of California Fund's
investment portfolio can be achieved than is currently possible in
either Fund. Greater diversification is expected to be beneficial
to shareholders of both Funds, because it may reduce the negative
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<PAGE> 26
effect which the adverse performance of any one security may have
on the performance of the entire portfolio.
Fourth, the Board of Trustees believes that the California
Fund Class A Shares received in the Reorganization will provide
existing California Portfolio shareholders with substantially the
same investment advantages that they currently enjoy at a
comparable level of risk. The Board of Trustees also considered
the performance history of each Fund.
Fifth, a combined fund offers economies of scale that should
have a positive effect on the expenses borne indirectly by the
shareholders of California Portfolio. Both Funds incur
substantial overhead costs for accounting, legal, transfer agency
services, insurance, and custodial and administrative services.
The Trust's Board of Trustees expects that the Reorganization will
result in a decrease in the expenses payable by California
Portfolio (and hence indirectly borne by its shareholders),
without giving effect to the voluntary and temporary expense
limitations currently in effect for both Funds. Giving effect to
the expense limitations currently in effect, the Reorganization
will result in an increase in estimated total operating expenses
attributable to shareholders of California Portfolio.
In determining that the Reorganization is in the best in-
terests of California Portfolio and the interests of its
shareholders, the Board of Trustees considered the fact that the
Adviser will receive certain benefits from the Reorganization.
The Reorganization will result in a consolidated portfolio man-
agement effort, and may result in time savings to the Adviser by
reducing the number of reports and regulatory filings that it
needs to prepare. In addition, the Reorganization is expected to
reduce the amount by which the Adviser has voluntarily and
temporarily agreed to reduce the Funds' expenses.
UNREIMBURSED DISTRIBUTION AND SHAREHOLDER SERVICE EXPENSES
The Board of Trustees of California Fund has determined that,
if the Reorganization is consummated, distribution and shareholder
service expenses incurred in connection with shares of California
Portfolio, and not reimbursed under California Portfolio's Rule
12b-1 Plan, will be reimbursable expenses under California Fund's
Class A Rule 12b-1 Plan (the "assumption"). However, the maximum
aggregate amounts payable during any fiscal year under California
Fund's Rule 12b-1 Plan (0.15% of average daily net assets
attributable to Class A shares) will not be affected by the
assumption.
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<PAGE> 27
With respect to Class A shares of California Fund, the
Reorganization and the assumption will not result in a material
increase on a pro forma basis in the percentage that the
unreimbursed expenses represent of the combined Funds' net assets.
As of December 31, 1994, California Fund had no unreimbursed
distribution and shareholder service expenses attributable to its
Class A shares. As of the same date, the unreimbursed
distribution and shareholder service expenses of California
Portfolio were $98,304 (0.22% of California Portfolio's net
assets).
After the Reorganization, on a pro forma combined basis, the
unreimbursed distribution and shareholder service expenses of
California Fund attributable to Class A shares will be $98,304
(0.03% of California Fund's pro forma net assets attributable to
Class A shares).
The assumption will have no immediate effect upon the pay-
ments made under California Fund's Class A Rule 12b-1 Plan.
California Fund is not obligated to assure that these amounts are
recouped by John Hancock Funds.
Unreimbursed distribution and shareholder service expenses do
not currently appear as an expense or liability in the financial
statements of either Fund, nor will they appear in the financial
statements of California Fund after the Reorganization until paid
or accrued. Unreimbursed expenses do not enter into the
calculation of a Fund's net asset value or the formula for
calculating Rule 12b-1 payments. Even in the event of termination
or noncontinuance of California Fund's Rule 12b-1 Plans,
California Fund is not legally committed, and is not required to
commit, to the payment of any unreimbursed distribution and
shareholder service expenses. The staff of the SEC has not
approved or disapproved the treatment of the unreimbursed
distribution and shareholder service expenses described in this
Proxy Statement.
BOARDS' EVALUATION AND RECOMMENDATION
On the basis of the factors described above and other fac-
tors, the Trust's Board of Trustees, including a majority of the
Trustees who are not "interested persons" (as defined in the
Investment Company Act) of California Portfolio, determined that
the Reorganization is in the best interests of California
Portfolio and that the interests of California Portfolio's
shareholders will not be diluted as a result of the
Reorganization. On the same basis, the Board of Trustees of
California Fund, including a majority of the Trustees who are not
"interested persons" (as defined in the Investment Company Act) of
California Fund, determined that the Reorganization is in the best
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<PAGE> 28
interests of California Fund and that the interests of California
Fund's shareholders will not be diluted as a result of the
Reorganization.
THE TRUSTEES OF CALIFORNIA PORTFOLIO RECOMMEND THAT
SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE AGREEMENT AND
PLAN OF REORGANIZATION.
DESCRIPTION OF AGREEMENT
The following description of the Agreement is a summary, does
not purport to be complete, and is subject in all respects to the
provisions of the Agreement, and is qualified in its entirety by
reference to the Agreement. A copy of the Agreement is attached
to this Proxy Statement and Prospectus as Exhibit A and should be
read in its entirety. Paragraph references are to appropriate
provisions of the Agreement.
Method of Carrying Out Reorganization. If California
Portfolio shareholders approve the Agreement, the Reorganization
will be consummated promptly after the various conditions to the
obligations of each of the parties are satisfied (see Agreement,
paragraphs 6 through 8). The Reorganization will be completed on
the Closing Date (as defined above).
On the Closing Date, California Portfolio will transfer all
of its assets to California Fund in exchange for California Fund
Class A Shares with an aggregate net asset value equal to the
value of the assets delivered, less the liabilities of California
Portfolio assumed, as of the close of business on the Closing Date
(see Agreement, paragraphs 1 and 2).
The value of California Portfolio's assets and California
Fund's net asset value per Class A share will be determined
according to the valuation procedures set forth in California
Fund's Declaration of Trust, By-laws and Prospectus (see "Share
Price" in the California Fund Prospectus). No initial sales
charge or CDSC will be imposed upon delivery of the California
Fund Class A Shares in exchange for the assets of California
Portfolio.
Surrender of Share Certificates. California Portfolio
shareholders whose shares are represented by one or more share
certificates should, prior to the Closing Date, either surrender
their certificates to California Portfolio or deliver to
California Portfolio an affidavit with respect to lost
certificates, in such form and accompanied by such surety bonds as
California Portfolio may require (collectively, an "Affidavit").
On the Closing Date, all certificates which have not been
surrendered will be deemed to be cancelled, will no longer
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<PAGE> 29
evidence ownership of California Portfolio's shares and will
evidence ownership of California Fund Class A Shares.
Shareholders may not redeem or transfer California Fund Class A
Shares received in the Reorganization until they have surrendered
their California Portfolio share certificates or delivered an
Affidavit relating to them. Unless a shareholder specifically
requests a share certificate, California Fund will not issue share
certificates in the Reorganization.
Conditions Precedent to Closing. The obligation of
California Portfolio to consummate the Reorganization is subject
to the satisfaction of certain conditions precedent, including the
performance by California Fund of all acts and undertakings
required under the Agreement and the receipt of all consents,
orders and permits necessary to consummate the Reorganization (see
Agreement, paragraphs 6 through 8).
The obligation of California Fund to consummate the Re-
organization is subject to the satisfaction of certain conditions
precedent, including the performance by the Trust and California
Portfolio of all acts and undertakings to be performed under the
Agreement, the receipt of certain documents and financial
statements from California Portfolio and the receipt of all
consents, orders and permits necessary to consummate the
Reorganization (see Agreement, paragraphs 6 through 8).
The obligations of both parties are subject to the receipt of
approval and authorization of the Agreement by the vote of not
less than a majority of the outstanding shares of beneficial in-
terest of California Portfolio entitled to vote (as described in
the section captioned "Voting Rights and Required Vote"), and the
receipt of a favorable opinion of Hale and Dorr as to the federal
income tax consequences of the Reorganization (see Agreement,
paragraph 8.6).
Termination of Agreement. The Agreement may be terminated,
whether or not approval of California Portfolio's shareholders has
been obtained, by mutual agreement of the parties. In addition,
either party may terminate its obligations under the Agreement at
or prior to the Closing Date, because of a material breach by the
other party of any representations, warranties or agreements
contained in the Agreement, or if a condition precedent in the
Agreement has not been met.
Expenses of the Reorganization. California Fund and
California Portfolio will each be responsible for its own expenses
incurred in connection with entering into and carrying out the
provisions of the Reorganization Agreement, whether or not the
Reorganization is consummated.
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TAX CONSIDERATIONS
The consummation of the Reorganization is subject to the
receipt of a favorable opinion of Hale and Dorr, counsel to the
Funds, satisfactory to the Trust and California Fund and sub-
stantially to the effect that:
(i) The acquisition by California Fund of all of the
assets of California Portfolio solely in exchange for the issuance
of California Fund Class A Shares to California Portfolio and the
assumption of all of California Portfolio's liabilities by
California Fund, followed by the distribution by California
Portfolio, in liquidation of California Portfolio, of California
Fund Class A Shares to the shareholders of California Portfolio in
exchange for their shares of beneficial interest of California
Portfolio and the termination of California Portfolio, will
constitute a "reorganization" within the meaning of Section 368(a)
of the Code, and California Portfolio and California Fund will each
be "a party to a reorganization" within the meaning of
Section 368(b) of the Code;
(ii) no gain or loss will be recognized by California
Portfolio upon (a) the transfer of all of its assets to California
Fund solely in exchange for the issuance of California Fund Class A
Shares to California Portfolio, and the assumption of all of
California Portfolio's liabilities by California Fund; and (b) the
distribution by California Portfolio of these California Fund
Class A Shares to the shareholders of California Portfolio;
(iii) no gain or loss will be recognized by California
Fund upon the receipt of California Portfolio's assets solely in
exchange for the issuance of California Fund Class A Shares to
California Portfolio and the assumption of all of California
Portfolio's liabilities by California Fund;
(iv) the basis of the assets of California Portfolio
acquired by California Fund will be, in each instance, the same as
the basis of those assets in the hands of California Portfolio
immediately prior to the transfer;
(v) the tax holding period of the assets of
California Portfolio in the hands of California Fund will, in each
instance, include California Portfolio's tax holding period for
those assets;
(vi) the shareholders of California Portfolio will
not recognize gain or loss upon the exchange of all their California
Portfolio shares solely for California Fund Class A Shares as part
of the Reorganization;
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<PAGE> 31
(vii) the basis of the California Fund Class A Shares
received by the California Portfolio shareholders in the Reorgani-
zation will be the same as the basis of the California Portfolio
shares surrendered in exchange therefor; and
(viii) the tax holding period of the California Fund
Class A Shares received by the California Portfolio shareholders
will include, for each shareholder, the tax holding period for the
California Portfolio shares surrendered in exchange therefor,
provided the California Portfolio shares were held as capital assets
on the date of the exchange.
VOTING RIGHTS AND REQUIRED VOTE
Each California Portfolio share is entitled to one vote.
Approval of the Proposal requires the affirmative vote of a majority
of the outstanding voting securities of California Portfolio. Under
the Investment Company Act, this means that, to be approved, the
Proposal must receive the affirmative vote of the lesser of (i) 67%
or more of the outstanding shares of California Portfolio present at
the Meeting and entitled to vote, if the holders of more than 50% of
the outstanding shares of California Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding
shares of California Portfolio.
Shares of beneficial interest of California Portfolio
represented in person or by proxy (including shares which abstain or
do not vote with respect to the Proposal) will be counted for
purposes of determining whether a quorum is present at the meeting.
Accordingly, an abstention from voting has the same effect as a vote
against the Proposal. However, if a broker or nominee holding
shares in "street name" indicates on the proxy card that it does not
have discretionary authority to vote on the Proposal, those shares
will not be considered as present and entitled to vote with respect
to the Proposal. Accordingly, a "broker non-vote" has no effect on
the voting in determining whether the Proposal has been adopted
pursuant to item (i) above, provided that the holders of more than
50% of the outstanding shares (excluding the "broker non-votes") are
present or represented. However, with respect to determining
whether the Proposal has been adopted pursuant to item (ii) above,
because shares represented by a "broker non-vote" are considered
outstanding shares, a "broker non-vote" has the same effect as a
vote against the Proposal.
If the requisite approval of shareholders is not obtained,
California Portfolio will continue to engage in business as a series
of a registered open-end, management investment company and the
Trust's Board of Trustees will consider what further action may be
appropriate.
-22-
<PAGE> 32
<TABLE>
CAPITALIZATION
The following table sets forth the capitalization of
California Fund and California Portfolio as of December 31, 1994,
and the pro forma combined capitalization of both California Fund
and California Portfolio as if the Reorganization had occurred on
that date. The table reflects a pro forma exchange ratio of
approximately 1.1638 California Fund Class A Shares being issued for
each share of California Portfolio. If the Reorganization is
consummated, the actual exchange ratio on the Closing Date may vary
from the exchange ratio indicated due to changes in the market value
of the portfolio securities of both California Fund and California
Portfolio between December 31, 1994 and the Closing Date, changes in
the amount of undistributed net investment income and net realized
capital gains of California Fund and California Portfolio during
that period resulting from income and distributions, and changes in
the accrued liabilities of California Fund and California Portfolio
during the same period.
<CAPTION>
DECEMBER 31, 1994
CALIFORNIA CALIFORNIA PRO FORMA
PORTFOLIO FUND COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
Net Assets ................. $45,314,950 $241,583,058 $286,898,008
Net Asset Value Per Share: $10.80 $9.28 $9.28
Shares Outstanding: 4,196,941 26,034,286 30,917,669(1)
<FN>
------------------------
(1) If the Reorganization had taken place on December 31, 1994,
California Portfolio would have received 4,883,383 Class A
shares of California Fund which would have been available
for distribution to California Portfolio's shareholders. No
assurance can be given as to the number of Class A shares of
California Fund that will be received by California
Portfolio on the Closing Date. The foregoing is merely an
example of what California Portfolio would have received and
distributed had the Reorganization been consummated on
December 31, 1994 and should not be relied upon to reflect
the amount that will actually be received on the Closing
Date.
</TABLE>
-23-
<PAGE> 33
COMPARATIVE PERFORMANCE INFORMATION
TOTAL RETURN
The average annual total return at the public offering price
of California Portfolio's shares for the one-year and five-year
periods ended December 31, 1994 was (10.33)% and 5.36%,
respectively. The average annual total return at the public
offering price of California Portfolio's shares for the period from
September 9, 1987 (commencement of operations) through December 31,
1994 was 7.04%.
The average annual total return at the public offering price
of California Fund's Class A shares for the one-year and five-year
periods ended December 31, 1994 was (13.61)%, and 5.00%,
respectively.
The average annual total return is determined by multiplying
a hypothetical initial investment of $1,000 in a class by the
average annual compound rate of return (including capital
appreciation/depreciation, and dividends and distributions paid and
reinvested) attributable to that class for the stated period and
annualizing the result.
The table below indicates the total return (capital changes
plus reinvestment of all dividends and distributions) on a hypo-
thetical investment of $1,000 in shares of California Portfolio and
Class A shares of California Fund covering the indicated periods
ending December 31, 1994. The data below represent historical
performance which should not be considered indicative of future
performance of either California Fund or California Portfolio.
Performance and net asset value of both California Portfolio and
California Fund will fluctuate such that shares, when redeemed, may
be worth more or less than their original cost.
-24-
<PAGE> 34
<TABLE>
VALUE OF A $1,000 INVESTMENT IN CALIFORNIA PORTFOLIO
(UNAUDITED)
<CAPTION>
Value of
Investment on Total Return Total Return
Dec. 31, 1994 Including Sales Charge Excluding Sales Charge
Investment Amount of Including ---------------------- ------------------------
Investment Period Date Investment Sales Charge Cumulative Annualized Cumulative Annualized
- ----------------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
5 years ended
December 31, 1994 ... 12/31/89 $1,000 $1,298.30 29.83% 5.36% 42.62% 7.36%
1 year ended
December 31, 1994 ... 12/31/93 $1,000 $ 896.75 (10.33)% (10.33)% (7.09)% (7.09)%
</TABLE>
<TABLE>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
(UNAUDITED)
<CAPTION>
Value of
Investment on Total Return Total Return
Dec. 31, 1994 Including Sales Charge Excluding Sales Charge
Investment Amount of Including ---------------------- ------------------------
Investment Period Date Investment Sales Charge Cumulative Annualized Cumulative Annualized
- ----------------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
5 years ended
December 31, 1994 ... 12/31/89 $1,000 $1,276.10 27.61% 5.00% 33.99% 6.03%
1 year ended
December 31, 1994 ... 12/31/93 $1,000 $ 863.91 (13.61)% (13.61)% (9.31)% (9.31)%
</TABLE>
-25-
<PAGE> 35
BUSINESS OF CALIFORNIA FUND
GENERAL
For a discussion of the organization and operation of
California Fund, see "Investment Objectives and Policies" and "Or-
ganization and Management of the Fund" in the California Fund
Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of California Fund's investment objective
and policies, see "Investment Objectives and Policies" in the
California Fund Prospectus.
PORTFOLIO MANAGEMENT
All investment decisions for California Fund are made by the
Adviser's fixed-income portfolio management team. No single person
is primarily responsible for making recommendations to the team.
TRUSTEES
For a discussion of the responsibilities of California
Fund's Board of Trustees, see "Organization and Management of the
Fund" in the California Fund Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding California Fund's investment
adviser and distributor, see "Organization and Management of the
Fund," "How to Buy Shares" and "Share Price" in the California Fund
Prospectus.
EXPENSES
For a discussion of California Fund's expenses, see "Expense
Information" and "The Fund's Expenses" in the California Fund
Prospectus.
CUSTODIAN AND TRANSFER AGENT
California Fund's custodian is Investors Bank & Trust
Company. California Fund's transfer agent is Investor Services.
-26-
<PAGE> 36
CALIFORNIA FUND CLASS A SHARES
For a discussion of the California Fund Class A Shares, see
"Organization and Management of the Fund" in the California Fund
Prospectus.
PURCHASE OF CALIFORNIA FUND CLASS A SHARES
For a discussion of how Class A shares of California Fund
may be purchased or exchanged, see "How to Buy Shares," "Alternative
Purchase Arrangements" and "Additional Services and Programs" in the
California Fund Prospectus.
REDEMPTION OF CALIFORNIA FUND CLASS A SHARES
For a discussion of how Class A shares of California Fund
may be redeemed, see "How to Redeem Shares" in the California Fund
Prospectus. Former shareholders of California Portfolio whose
shares are represented by share certificates will be required to
surrender their certificates for cancellation or deliver an
affidavit of loss accompanied by an adequate surety bond to Investor
Services in order to redeem California Fund Shares received in the
Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of California Fund's policy with respect to
dividends, distributions and taxes, see "Dividends and Taxes" in the
California Fund Prospectus.
BUSINESS OF CALIFORNIA PORTFOLIO
GENERAL
For a discussion of the organization and operation of
California Portfolio, see "Investment Objective and Policies" and
"Organization and Management of the Fund" in the California
Portfolio Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of California Portfolio's investment
objectives and policies, see "Investment Objective and Policies" in
the California Portfolio Prospectus.
-27-
<PAGE> 37
PORTFOLIO MANAGEMENT
Day-to-day management of California Portfolio is carried out
by Dianne Sales-Singer. Ms. Singer has been employed by the Adviser
since 1989.
TRUSTEES
For a discussion of the responsibilities of the Trust's
Board of Trustees, see "Organization and Management of the Fund" in
the California Portfolio Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding California Portfolio's investment
adviser and distributor, see "Organization and Management of the
Fund," "How to Buy Shares" and "Share Price" in the California
Portfolio Prospectus.
EXPENSES
For a discussion of the California Portfolio's expenses, see
"Expense Information" and "The Fund's Expenses" in the California
Portfolio Prospectus.
CUSTODIAN AND TRANSFER AGENT
California Portfolio's custodian is Investors Bank & Trust
Company. California Portfolio's transfer agent is Investor
Services.
CALIFORNIA PORTFOLIO SHARES
For a discussion of California Portfolio's shares of
beneficial interest, see "Organization and Management of the Fund"
in the California Portfolio Prospectus.
PURCHASE OF CALIFORNIA PORTFOLIO SHARES
For a discussion of how shares of California Portfolio may
be purchased or exchanged, see "How to Buy Shares," "Alternative
Purchase Arrangements" and "Additional Services and Programs" in the
California Portfolio Prospectus. In anticipation of the
Reorganization, California Portfolio has stopped offering its shares
to all investors other than existing shareholders.
-28-
<PAGE> 38
REDEMPTION OF CALIFORNIA PORTFOLIO SHARES
For a discussion of how shares of California Portfolio may
be redeemed (other than in the Reorganization), see "How to Redeem
Shares" in the California Portfolio Prospectus. California
Portfolio shareholders whose shares are represented by share
certificates will be required to surrender their certificates for
cancellation or deliver an affidavit of loss accompanied by an
adequate surety bond to Investor Services in order to redeem
California Fund Class A Shares received in the Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of California Portfolio's policy with
respect to dividends, distributions and taxes, see "Distributions
and Taxes" in the California Portfolio Prospectus.
EXPERTS
The respective financial statements and the financial
highlights of California Fund as of December 31, 1994 and for the
fiscal year then ended, incorporated by reference into this Proxy
Statement and Prospectus, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
in the Statement of Additional Information, and are included in
reliance upon such report given upon the authority of such firm as
experts in accounting and auditing. The financial statements and the
financial highlights of California Portfolio as of August 31, 1994 and
for the fiscal year then ended, incorporated by reference into this
Proxy Statement and Prospectus, have been audited by Price Waterhouse
LLP, independent auditors, as set forth in their report thereon
appearing in the Statement of Additional Information, and are included
in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
Each Fund is subject to the informational requirements of
the Securities Exchange Act of 1934 and the Investment Company Act,
and in accordance therewith file reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other
information filed by California Fund and the Trust, on behalf of
California Portfolio, can be inspected and copied (at prescribed
rates) at the public reference facilities of the SEC at 450 Fifth
Street, N.W., Washington, D.C., and at the following regional of-
fices: Chicago (500 West Madison Street, Suite 1400, Chicago, Il-
linois); and New York (7 World Trade Center, Suite 1300, New York,
New York). Copies of such material can also be obtained by mail
-29-
<PAGE> 39
from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
-30-
<PAGE> 40
EXHIBIT A
---------
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
this day of 1995, by and between John Hancock California Tax-Free
Income Fund (the "Acquiring Fund"), a Massachusetts business trust, and
California Portfolio (the "Acquired Fund"), a series of John Hancock Tax-Exempt
Series Fund (the "Trust"), a Massachusetts business trust. The principal place
of business of the Acquiring Fund and the Trust is 101 Huntington Avenue,
Boston, Massachusetts 02199. The Acquiring Fund and the Acquired Fund are
sometimes referred to collectively herein as the "Funds" and individually as
a "Fund."
This Agreement is intended to be and is adopted as a plan of
"reorganization," as such term is used in Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). The reorganization will consist
of the transfer of all of the assets of the Acquired Fund to the Acquiring
Fund in exchange solely for the issuance of Class A shares of beneficial
interest of the Acquiring Fund (the "Acquiring Fund Shares") to the Acquired
Fund and the assumption by the Acquiring Fund of all of the liabilities of
the Acquired Fund, followed by the distribution by the Acquired Fund, on or
promptly after the Closing Date hereinafter referred to, of the Acquiring Fund
Shares to the shareholders of the Acquired Fund in liquidation and termination
of the Acquired Fund as provided herein, all upon the terms and conditions set
forth in this Agreement.
In consideration of the premises of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR
ASSUMPTION OF LIABILITIES AND ISSUANCE OF ACQUIRING FUND
SHARES; LIQUIDATION OF THE ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets (consisting,
without limitation, of portfolio securities and instruments, dividends and
interest receivables, cash and other assets), as set forth in the statement of
assets and liabilities referred to in Paragraph 7.2 hereof (the "Statement of
Assets and Liabilities"), to the Acquiring Fund free and clear of all liens
and encumbrances, except as otherwise provided herein, in exchange for (i) the
assumption by the Acquiring Fund of the known and unknown liabilities of the
Acquired Fund, including the liabilities set forth in the Statement of Assets
and Liabilities (the "Acquired Fund Liabilities"), which shall be assigned and
transferred to the Acquiring Fund by the Acquired Fund and assumed
<PAGE> 41
by the Acquiring Fund, and (ii) delivery by the Acquiring Fund to the Acquired
Fund, for distribution PRO RATA by the Acquired Fund to its shareholders in
proportion to their ownership of shares of beneficial interest of the Acquired
Fund, as of the close of business on the closing date (the "Closing Date"), of
a number of the Acquiring Fund Shares having an aggregate net asset value
equal to the value of the assets, less such liabilities (herein referred to as
the "net value of the assets"), of the Acquired Fund so transferred, assumed,
assigned and delivered, all determined as provided in Paragraph 2.1 hereof and
as of a date and time as specified therein. Such transactions shall take place
at the closing provided for in Paragraph 3.1 hereof (the "Closing"). All
computations shall be provided by Investors Bank & Trust Company (the
"Custodian"), as custodian and pricing agent for the Acquiring Fund and the
Acquired Fund, and shall be recomputed by Ernst & Young LLP, the independent
accountants of the Acquiring Fund. The determination of the Custodian, as
recomputed by said accountants, shall, absent manifest error, be conclusive
and binding on all parties in interest.
1.2 The Acquired Fund has provided the Acquiring Fund with a list of
the current securities holdings of the Acquired Fund as of the date of
execution of this Agreement. The Acquired Fund reserves the right to sell any
of these securities (except to the extent sales may be limited by
representations made in connection with issuance of the tax opinion provided
for in Paragraph 8.6 hereof) but will not, without the prior approval of the
Acquiring Fund, acquire any additional securities other than securities of
the type in which the Acquiring Fund is permitted to invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear its own
expenses in connection with the transactions contemplated by this Agreement.
1.4 On or as soon after the Closing Date as is conveniently
practicable (the "Liquidation Date"), the Acquired Fund will liquidate and
distribute PRO RATA to shareholders of record (the "Acquired Fund
shareholders"), determined as of the close of regular trading on the New York
Stock Exchange on the Closing Date, the Acquiring Fund Shares received by the
Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Acquired Fund on the books of the
Acquiring Fund, to open accounts on the share records of the Acquiring Fund in
the names of the Acquired Fund shareholders and representing the respective
PRO RATA number of Acquiring Fund Shares due such shareholders. The Acquiring
Fund shall not issue certificates representing Acquiring Fund Shares in
connection with such exchange.
2
<PAGE> 42
1.5 The Acquired Fund shareholders holding certificates representing
their ownership of shares of beneficial interest of the Acquired Fund shall
surrender such certificates or deliver an affidavit with respect to lost
certificates in such form and accompanied by such surety bonds as the Acquired
Fund may require (collectively, an "Affidavit"), to John Hancock Investor
Services Corporation prior to the Closing Date. Any Acquired Fund share
certificate which remains outstanding on the Closing Date shall be deemed to
be cancelled, shall no longer evidence ownership of shares of beneficial
interest of the Acquired Fund and shall evidence ownership of Acquiring Fund
Shares. Unless and until any such certificate shall be so surrendered or an
Affidavit relating thereto shall be delivered, dividends and other
distributions payable by the Acquiring Fund subsequent to the Liquidation Date
with respect to Acquiring Fund Shares shall be paid to the holder of such
certificate(s), but such shareholders may not redeem or transfer Acquiring
Fund Shares received in the Reorganization. The Acquiring Fund will not issue
share certificates in the Reorganization.
1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares
in a name other than the registered holder of the Acquiring Fund Shares on the
books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.7 The existence of the Acquired Fund shall be terminated as
promptly as practicable following the Liquidation Date.
1.8 Any reporting responsibility of the Trust with respect to the
Acquired Fund, including, but not limited to, the responsibility for filing of
regulatory reports, tax returns, or other documents with the Securities and
Exchange Commission (the "Commission"), any state securities commissions, and
any federal, state or local tax authorities or any other relevant regulatory
authority, is and shall remain the responsibility of the Trust.
3
<PAGE> 43
2. VALUATION
2.1 The net asset value of the Acquiring Fund Shares and the net
value of the assets of the Acquired Fund to be transferred shall in each case
be determined as of the close of business (4:00 p.m. Boston time) on the Closing
Date. The net asset value of the Acquiring Fund Shares shall be computed by
the Custodian in the manner set forth in the Acquiring Fund's Declaration of
Trust, as amended and restated, or By-laws and the Acquiring Fund's
then-current prospectus and statement of additional information and shall be
computed in each case to not fewer than four decimal places. The net value of
the assets of the Acquired Fund to be transferred shall be computed by the
Custodian by calculating the value of the assets transferred by the Acquired
Fund and by subtracting therefrom the amount of the liabilities assigned and
transferred to and assumed by the Acquiring Fund on the Closing Date, said
assets and liabilities to be valued in the manner set forth in the Acquired
Fund's then-current prospectus and statement of additional information and
shall be computed in each case to not fewer than four decimal places.
2.2 The number of Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the Acquired Fund's assets shall be
determined by dividing the value of the Acquired Fund's assets, less the
liabilities assumed by the Acquiring Fund, by the Acquiring Fund's net asset
value per Class A share, all as determined in accordance with Paragraph 2.1
hereof.
2.3 All computations of value shall be made by the Custodian in
accordance with its regular practice as pricing agent for the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be September 8, 1995 or such other date on
or before December 31, 1995, as the parties may agree in writing. The Closing
shall be held as of 5:00 p.m. at the offices of the Trust and the Acquiring
Fund, 101 Huntington Avenue, Boston, Massachusetts 02199, or at such other
time and/or place as the parties may agree in writing.
3.2 Portfolio securities that are not held in book-entry form in the
name of the Custodian as record holder for the Acquired Fund shall be
presented by the Acquired Fund to the Custodian for examination no later than
five business days preceding the Closing Date. Portfolio securities which are
not
4
<PAGE> 44
held in book-entry form shall be delivered by the Acquired Fund to the
Custodian for the account of the Acquiring Fund on the Closing Date, duly
endorsed in proper form for transfer, in such condition as to
constitute good delivery thereof in accordance with the custom of brokers, and
shall be accompanied by all necessary federal and state stock transfer stamps
or a check for the appropriate purchase price thereof. Portfolio securities
held of record by the Custodian in book-entry form on behalf of the Acquired
Fund shall be delivered to the Acquiring Fund by the Custodian by recording
the transfer of beneficial ownership thereof on its records. The cash
delivered shall be in the form of currency or by the Custodian crediting the
Acquiring Fund's account maintained with the Custodian with immediately
available funds.
3.3 In the event that on the Closing Date (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted or
(b) trading or the reporting of trading on said Exchange or elsewhere shall be
disrupted so that accurate appraisal of the value of the net assets of the
Acquiring Fund or the Acquired Fund is impracticable, the Closing Date shall
be postponed until the first business day after the day when trading shall
have been fully resumed and reporting shall have been restored; provided that
if trading shall not be fully resumed and reporting restored on or before
December 31, 1995, this Agreement may be terminated by the Acquiring Fund or
by the Acquired Fund upon the giving of written notice to the other party.
3.4 The Acquired Fund shall deliver at the Closing a list of the
names, addresses, federal taxpayer identification numbers and backup
withholding and nonresident alien withholding status of the Acquired Fund
shareholders and the number of outstanding shares of beneficial interest of
the Acquired Fund owned by each such shareholder, all as of the close of
business on the Closing Date, certified by its Treasurer, Secretary or other
authorized officer (the "Shareholder List"). The Acquiring Fund shall issue and
deliver to the Acquired Fund a confirmation evidencing the Acquiring Fund
Shares to be credited on the Closing Date, or provide evidence satisfactory to
the Acquired Fund that such Acquiring Fund Shares have been credited to the
Acquired Fund's account on the books of the Acquiring Fund. At the Closing,
each party shall deliver to the other such bills of sale, checks,
assignments, stock certificates, receipts or other documents as such other
party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Trust on behalf of the Acquired Fund represents, warrants and
covenants to the Acquiring Fund as follows:
5
<PAGE> 45
(a) The Trust is a business trust duly organized, validly existing and
in good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and, subject to
approval by the shareholders of the Acquired Fund, to carry out the
transactions contemplated by this Agreement. Neither the Trust nor the
Acquired Fund is required to qualify to do business in any jurisdiction in
which it is not so qualified or where failure to qualify would not subject
it to any material liability or disability. The Trust has all necessary
federal, state and local authorizations to own all of its properties and
assets and to carry on its business as now being conducted;
(b) The Trust is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"), is in full force and effect. The Acquired Fund is a
non-diversified series of the Trust;
(c) The Trust and the Acquired Fund are not, and the execution,
delivery and performance of their obligations under this Agreement will
not result, in violation of any provision of the Trust's Declaration of
Trust, as amended and restated, or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Trust or the
Acquired Fund is a party or by which it is bound;
(d) Except as otherwise disclosed in writing and accepted by the
Acquiring Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Trust or the Acquired Fund or any of the
Acquired Fund's properties or assets. The Trust knows of no facts which
might form the basis for the institution of such proceedings, and neither
the Trust nor the Acquired Fund is a party to or subject to the provisions
of any order, decree or judgment of any court or governmental body which
materially and adversely affects the Acquired Fund's business or its
ability to consummate the transactions herein contemplated;
(e) The Acquired Fund has no material contracts or other commitments
(other than this Agreement or agreements for the purchase of securities
entered into in the ordinary course of business and consistent with its
obligations under this Agreement) which will not be terminated without
6
<PAGE> 46
liability to the Acquired Fund at or prior to the Closing Date;
(f) The statement of assets and liabilities, including the schedule of
investments, of the Acquired Fund as of February 28, 1995 and the related
statement of operations for the six months then ended (unaudited), and the
statement of assets and liabilities, including the schedule of
investments, of the Acquired Fund as of August 31, 1994 and the related
statement of operations for the year then ended, and the statement of
changes in net assets for the years ended August 31, 1994 and 1993
(audited by Price Waterhouse LLP) (copies of which have been furnished to
the Acquiring Fund) present fairly in all material respects the financial
condition of the Acquired Fund as of February 28, 1995 and August 31,
1994, respectively, and the results of its operations and changes in net
assets for the respective stated periods in accordance with generally
accepted accounting principles consistently applied, and there were no
actual or contingent liabilities of the Acquired Fund as of the respective
dates thereof not disclosed therein;
(g) Since February 28, 1995, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquired Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by the Acquiring Fund;
(h) At the date hereof and by the Closing Date, all federal, state and
other tax returns and reports, including information returns and payee
statements, of the Acquired Fund required by law to have been filed or
furnished by such dates shall have been filed or furnished, and all
federal, state and other taxes, interest and penalties shall have been
paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge no such return
is currently under audit and no assessment has been asserted with respect
to such returns or reports;
(i) The Acquired Fund has elected to be treated as a regulated
investment company for federal income tax purposes, has qualified as such
for each taxable year of its operation and will qualify as such as of the
Closing Date with respect to its final taxable year ending on the Closing
Date;
7
<PAGE> 47
(j) The authorized capital of the Trust consists of an unlimited
number of shares of beneficial interest, no par value per share. All
issued and outstanding shares of beneficial interest of the Acquired Fund
are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Trust. All of the issued
and outstanding shares of beneficial interest of the Acquired Fund will,
at the time of Closing, be held by the persons and in the amounts set
forth in the Shareholder List submitted to the Acquiring Fund pursuant to
Paragraph 3.4 hereof. The Acquired Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of its
shares of beneficial interest, nor is there outstanding any security
convertible into any of its shares of beneficial interest;
(k) At the Closing Date, the Acquired Fund will have good and
marketable title to the assets to be transferred to the Acquiring Fund
pursuant to Paragraph 1.1 hereof, and full right, power and authority to
sell, assign, transfer and deliver such assets hereunder, and upon
delivery and payment for such assets, the Acquiring Fund will acquire good
and marketable title thereto subject to no restrictions on the full
transfer thereof, including such restrictions as might arise under the
Securities Act of 1933, as amended (the "1933 Act");
(l) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the Trust on
behalf of the Acquired Fund, and this Agreement constitutes a valid and
binding obligation of the Trust and the Acquired Fund enforceable in
accordance with its terms, subject to the approval of the Acquired Fund's
shareholders;
(m) The information to be furnished by the Acquired Fund to the
Acquiring Fund for use in applications for orders, registration
statements, proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby shall be accurate and
complete and shall comply in all material respects with federal securities
and other laws and regulations thereunder applicable thereto;
(n) The proxy statement of the Acquired Fund (the "Proxy Statement")
to be included in the Registration Statement referred to in Paragraph 5.7
hereof (other than written information furnished by the Acquiring Fund for
inclusion therein, as covered by the Acquiring Fund's
8
<PAGE> 48
warranty in Paragraph 4.2(m) hereof), on the effective date of the
Registration Statement, on the date of the meeting of the Acquired
Fund shareholders and on the Closing Date, shall not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated by this Agreement;
(p) All of the issued and outstanding shares of beneficial interest of
the Acquired Fund have been offered for sale and sold in conformity with
all applicable federal and state securities laws;
(q) The prospectus of the Acquired Fund, dated January 1, 1995 (the
"Acquired Fund Prospectus"), previously furnished to the Acquiring Fund,
does not contain any untrue statements of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading.
4.2 The Acquiring Fund represents, warrants and covenants to the
Acquired Fund as follows:
(a) The Acquiring Fund is a business trust duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has the power to own all of its properties and assets
and to carry out the Agreement. The Acquiring Fund is not required to
qualify to do business in any jurisdiction in which it is not so
qualified or where failure to qualify would not subject it to any material
liability or disability. The Acquiring Fund has all necessary federal,
state and local authorizations to own all of its properties and assets and
to carry on its business as now being conducted;
(b) The Acquiring Fund is a registered investment company classified
as a management company and its registration with the Commission as an
investment company under the 1940 Act is in full force and effect. The
Acquiring Fund is a diversified investment company under the 1940 Act;
9
<PAGE> 49
(c) The prospectus (the "Acquiring Fund Prospectus") and statement of
additional information for Class A and Class B shares of the Acquiring
Fund, each dated May 1, 1995, and any amendments or supplements thereto on
or prior to the Closing Date, and the Registration Statement on Form N-14
to be filed in connection with this Agreement (the "Registration
Statement") (other than written information furnished by the Acquired Fund
for inclusion therein, as covered by the Acquired Fund's warranty in
Paragraph 4.1(m) hereof) will conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder, the Acquiring Fund
Prospectus does not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading and the Registration Statement will not
include any untrue statement of material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(d) At the Closing Date, the Acquiring Fund will have good and
marketable title to the assets of the Acquiring Fund;
(e) The Acquiring Fund is not, and the execution, delivery and
performance of its obligations under this Agreement will not result, in
violation of any provisions of the Acquiring Fund's Declaration of Trust,
as amended and restated, or By-laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquiring
Fund is a party or by which the Acquiring Fund is bound;
(f) Except as otherwise disclosed in writing and accepted by the
Acquired Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Acquiring Fund or any of the Acquiring
Fund's properties or assets. The Acquiring Fund knows of no facts which
might form the basis for the institution of such proceedings, and the
Acquiring Fund is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects the Acquiring Fund's business or its
ability to consummate the transactions herein contemplated;
10
<PAGE> 50
(g) The statement of assets and liabilities of the Acquiring Fund, as
of June 30, 1995, and the related statement of operations for the period
then ended and the schedule of investments (unaudited) (copies of which
have been furnished to the Acquired Fund), present fairly in all material
respects the financial position of the Acquiring Fund as of June 30, 1995
and the results of its operations for the period then ended in accordance
with generally accepted accounting principles consistently applied and
there are no known actual or contingent liabilities of the Acquiring Fund
as of the respective dates thereof not disclosed herein;
(h) Since June 30, 1995, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquiring Fund of indebtedness maturing more
than one year from the date such indebtedness was incurred;
(i) The Acquiring Fund has elected to be treated as a regulated
investment company for federal income tax purposes, has qualified as such
for each taxable year of its operation and will qualify as such as of the
Closing Date;
(j) The authorized capital of the Acquiring Fund consists of an
unlimited number of shares of beneficial interest, $0.01 par value per
share. All issued and outstanding shares of beneficial interest of the
Acquiring Fund are, and at the Closing Date will be, duly and validly
issued and outstanding, fully paid and nonassessable by the Acquiring
Fund. The Acquiring Fund does not have outstanding any options, warrants
or other rights to subscribe for or purchase any of its shares of
beneficial interest, nor is there outstanding any security convertible
into any of its shares of beneficial interest;
(k) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms;
(l) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund pursuant to the terms of this Agreement, when so issued and
delivered, will be duly and validly issued shares of beneficial interest
of the Acquiring
11
<PAGE> 51
Fund and will be fully paid and nonassessable by the Acquiring Fund;
(m) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements, proxy materials and
other documents which may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete and shall comply in all
material respects with federal securities and other laws and regulations
applicable thereto; and
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated by the Agreement, except for the
registration of the Acquiring Fund Shares under the 1933 Act, the 1940 Act
and under state securities laws.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as expressly contemplated herein to the contrary, the
Acquiring Fund and the Trust on behalf of the Acquired Fund will operate their
respective businesses in the ordinary course between the date hereof and the
Closing Date, it being understood that such ordinary course of business will
include customary dividends and distributions and any other distributions
necessary or desirable to avoid federal income or excise taxes.
5.2 The Trust will call a meeting of the Acquired Fund shareholders
to consider and act upon this Agreement and to take all other action necessary
to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be
issued hereunder are not being acquired by the Acquired Fund for the purpose
of making any distribution thereof other than in accordance with the terms of
this Agreement.
5.4 The Trust on behalf of the Acquired Fund will provide such
information within its possession or reasonably obtainable as the Acquiring
Fund requests concerning the beneficial ownership of the Acquired Fund's
shares of beneficial interest.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund
and the Acquired Fund each shall take, or cause to be taken, all action, and
do or cause to be done, all things reasonably necessary, proper or advisable
to consummate the transactions contemplated by this Agreement.
12
<PAGE> 52
5.6 The Trust on behalf of the Acquired Fund shall furnish to the
Acquiring Fund on the Closing Date the Statement of Assets and Liabilities of
the Acquired Fund as of the Closing Date, which statement shall be prepared in
accordance with generally accepted accounting principles consistently applied
and shall be certified by the Trust's Treasurer or Assistant Treasurer. As
promptly as practicable but in any case within 60 days after the Closing Date,
the Acquired Fund shall furnish to the Acquiring Fund, in such form as is
reasonably satisfactory to the Acquiring Fund, a statement of the earnings and
profits of the Acquired Fund for federal income tax purposes and of any
capital loss carryovers and other items that will be carried over to the
Acquiring Fund as a result of Section 381 of the Code, and which statement
will be certified by the President of the Acquired Fund.
5.7 The Acquiring Fund will prepare and file with the Commission the
Registration Statement in compliance with the 1933 Act and the 1940 Act in
connection with the issuance of the Acquiring Fund Shares as contemplated
herein.
5.8 The Trust on behalf of the Acquired Fund will prepare a Proxy
Statement, to be included in the Registration Statement in compliance with the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the 1940 Act and the rules and regulations thereunder (collectively, the
"Acts") in connection with the special meeting of shareholders of the Acquired
Fund to consider approval of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST ON BEHALF OF
THE ACQUIRED FUND
The obligations of the Trust on behalf of the Acquired Fund to
complete the transactions provided for herein shall be, at its election,
subject to the performance by the Acquiring Fund of all the obligations to be
performed by it hereunder on or before the Closing Date, and, in addition
thereto, the following further conditions:
6.1 All representations and warranties of the Acquiring Fund
contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing
Date with the same force and effect as if made on and as of the
Closing Date; and
6.2 The Acquiring Fund shall have delivered to the Acquired
Fund a certificate executed in its name by the Acquiring Fund's
President or Vice President and its Treasurer or Assistant Treasurer,
in form and substance
13
<PAGE> 53
satisfactory to the Acquired Fund and dated as of the Closing Date, to
the effect that the representations and warranties of the Acquiring
Fund made in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the
Trust on behalf of the Acquired Fund shall reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be, at its election, subject to the performance by
the Trust on behalf of the Acquired Fund of all the obligations to be
performed by it hereunder on or before the Closing Date and, in addition
thereto, the following further conditions:
7.1 All representations and warranties of the Trust on behalf
of the Acquired Fund contained in this Agreement shall be true and
correct in all material respects as of the date hereof and, except as
they may be affected by the transactions contemplated by this
Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date;
7.2 The Trust on behalf of the Acquired Fund shall have
delivered to the Acquiring Fund the Statement of Assets and
Liabilities of the Acquired Fund, together with a list of its
portfolio securities showing the federal income tax bases and holding
periods of such securities, as of the Closing Date, certified by the
Treasurer or Assistant Treasurer of the Trust;
7.3 The Trust on behalf of the Acquired Fund shall have
delivered to the Acquiring Fund on the Closing Date a certificate
executed in the name of the Acquired Fund by a President or Vice
President and a Treasurer or Assistant Treasurer of the Trust, in form
and substance satisfactory to the Acquiring Fund and dated as of the
Closing Date, to the effect that the representations and warranties of
the Trust on behalf of the Acquired Fund in this Agreement are true
and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to
such other matters as the Acquiring Fund shall reasonably request; and
14
<PAGE> 54
7.4 At or prior to the Closing Date, the Acquired Fund's
investment adviser, or an affiliate thereof, shall have made all
payments, or applied all credits, to the Acquired Fund required by any
applicable contractual or state-imposed expense limitation.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST, THE
ACQUIRING FUND AND THE ACQUIRED FUND
The obligations hereunder of the Trust, the Acquiring Fund and the
Acquired Fund are each subject to the further conditions that on or before the
Closing Date:
8.1 The Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares
of beneficial interest of the Acquired Fund in accordance with the provisions
of the Trust's Declaration of Trust, as amended and restated, and By-Laws, and
certified copies of the resolutions evidencing such approval by the Acquired
Fund's shareholders shall have been delivered by the Acquired Fund to the
Acquiring Fund;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain changes or other relief in connection with,
this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of such federal or state authorities) deemed necessary
by the Trust or the Acquiring Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may
waive any such conditions for itself;
8.4 The Registration Statement shall have become effective under the
1933 Act and the 1940 Act and no stop orders suspending the effectiveness
thereof shall have been issued and, to the best knowledge of the parties
hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act or the
1940 Act;
15
<PAGE> 55
8.5 The Acquired Fund shall have distributed to its shareholders all
of its investment company taxable income (as defined in Section 852(b)(2) of
the Code) for its taxable year ending on the Closing Date and all of its net
capital gain (as such term is used in Section 852(b)(3)(C) of the Code), after
reduction by any available capital loss carryforward, for its taxable year
ending on the Closing Date; and
8.6 The parties shall have received an opinion of Messrs. Hale and
Dorr, satisfactory to the Acquiring Fund and the Trust on behalf of the
Acquired Fund, substantially to the effect that for federal income tax
purposes:
(a) The acquisition by the Acquiring Fund of all of the assets
of the Acquired Fund solely in exchange for the issuance of Acquiring
Fund Shares to the Acquired Fund and the assumption of all of the
Acquired Fund Liabilities by the Acquiring Fund, followed by the
distribution by the Acquired Fund, in liquidation of the Acquired
Fund, of Acquiring Fund Shares to the shareholders of the Acquired
Fund in exchange for their shares of beneficial interest of the
Acquired Fund and the termination of the Acquired Fund, will
constitute a reorganization within the meaning of Section 368(a) of
the Code, and the Acquired Fund and the Acquiring Fund will each be
"a party to a reorganization" within the meaning of Section 368(b) of
the Code;
(b) No gain or loss will be recognized by the Acquired Fund
upon (i) the transfer of all of its assets to the Acquiring Fund
solely in exchange for the issuance of Acquiring Fund Shares to the
Acquired Fund and the assumption of all of the Acquired Fund
Liabilities by the Acquiring Fund and (ii) the distribution by the
Acquired Fund of such Acquiring Fund Shares to the shareholders of the
Acquired Fund;
(c) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Acquired Fund solely in exchange
for the issuance of the Acquiring Fund Shares to the Acquired Fund and
the assumption of all of the Acquired Fund Liabilities by the
Acquiring Fund;
(d) The basis of the assets of the Acquired Fund acquired by
the Acquiring Fund will be, in each instance, the same as the basis of
those assets in the hands of the Acquired Fund immediately prior to
the transfer;
16
<PAGE> 56
(e) The tax holding period of the assets of the Acquired Fund
in the hands of the Acquiring Fund will, in each instance, include the
Acquired Fund's tax holding period for those assets;
(f) The shareholders of the Acquired Fund will not recognize
gain or loss upon the exchange of all of their shares of beneficial
interest of the Acquired Fund solely for Acquiring Fund Shares as part
of the transaction;
(g) The basis of the Acquiring Fund Shares received by the
Acquired Fund shareholders in the transaction will be the same as the
basis of the shares of beneficial interest of the Acquired Fund
surrendered in exchange therefor; and
(h) The tax holding period of the Acquiring Fund Shares
received by the Acquired Fund shareholders will include, for each
shareholder, the tax holding period for his shares of beneficial
interest of the Acquired Fund surrendered in exchange therefor,
provided that such Acquired Fund shares were held as capital assets on
the date of the exchange.
The Acquiring Fund and the Trust on behalf of the Acquired Fund agree
to make and provide representations which are reasonably necessary to enable
Hale and Dorr to deliver an opinion substantially as set forth in this
Paragraph 8.6. Notwithstanding anything herein to the contrary, neither the
Trust nor the Acquiring Fund may waive the conditions set forth in this
Paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund and the Trust on behalf of the Acquired Fund
represent and warrant to the other that there are no brokers or finders
entitled to receive any payments in connection with the transactions provided
for herein.
9.2 The Acquiring Fund and the Acquired Fund shall each be liable
solely for its own expenses incurred in connection with entering into and
carrying out the provisions of this Agreement whether or not the transactions
contemplated hereby are consummated.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Trust on behalf of the Acquired Fund
agree that neither party has made any representation, warranty or covenant not
set forth herein or
17
<PAGE> 57
referred to in Paragraph 4 hereof and that this Agreement constitutes the
entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Trust and the Acquiring Fund. In addition, either party may at its option
terminate this Agreement at or prior to the Closing Date:
(a) because of a material breach by the other of any
representation, warranty, covenant or agreement contained herein to be
performed at or prior to the Closing Date;
(b) because of a condition herein expressed to be precedent to
the obligations of the terminating party which has not been met and
which reasonably appears will not or cannot be met;
(c) by resolution of the Trust's Board of Trustees if
circumstances should develop that, in the good faith opinion of such
Board, make proceeding with the Agreement not in the best interest of
the Acquired Fund's shareholders; or
(d) by resolution of the Acquiring Fund's Board of Trustees if
circumstances should develop that, in the good faith opinion of such
Board, make proceeding with the Agreement not in the best interest of
the Acquiring Fund's shareholders.
11.2 In the event of any such termination, there shall be no liability
for damages on the part of the Trust, the Acquiring Fund or the Acquired Fund,
or the Trustees or officers of the Trust or the Acquiring Fund, but each party
shall bear the expenses incurred by it incidental to the preparation and
carrying out of this Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of the
Trust and the Acquiring Fund. However,
18
<PAGE> 58
following the meeting of shareholders of the Acquired Fund held pursuant to
Paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions regarding the method for determining the number of
Acquiring Fund Shares to be received by the Acquired Fund shareholders under
this Agreement to the detriment of such shareholders without their further
approval; provided that nothing contained in this Article 12 shall be
construed to prohibit the parties from amending this Agreement to change the
Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to the Acquiring Fund or to
the Trust, each at 101 Huntington Avenue, Boston, Massachusetts 02199,
Attention: President, and, in either case, with copies to Hale and Dorr, 60
State Street, Boston, Massachusetts 02109, Attention: Pamela J. Wilson, Esq.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance
with the laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no assignment
or transfer hereof or of any rights or obligations hereunder shall be made by
any party without the prior written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason
of this Agreement.
14.5 All persons dealing with the Trust or the Acquiring Fund must
look solely to the property of the Trust or the Acquiring Fund, respectively,
for the enforcement of any claims against the Trust or the Acquiring Fund as
neither the Trustees,
19
<PAGE> 59
officers, agents or shareholders of the Trust or the Acquiring Fund assume any
personal liability for obligations entered into on behalf of the Trust or the
Acquiring Fund, respectively. None of the other series of the Trust shall be
responsible for any obligations assumed by or on behalf of the Acquired Fund
under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its President or Vice President and attested by
its Secretary or Assistant Secretary and has caused its corporate seal to be
affixed hereto.
JOHN HANCOCK CALIFORNIA TAX-FREE
INCOME FUND
By:
--------------------------------
Name:
--------------------------------
Title:
-------------------------------
JOHN HANCOCK TAX-EXEMPT SERIES FUND,
on behalf of CALIFORNIA PORTFOLIO
By:
--------------------------------
Name:
--------------------------------
Title:
-------------------------------
20
<PAGE> 60
EXHIBIT B
---------
JOHN HANCOCK
CALIFORNIA TAX-FREE
INCOME FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1995
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expense Information................................................................... 2
The Fund's Financial Highlights....................................................... 3
Investment Objective and Policies..................................................... 4
Organization and Management of the Fund............................................... 10
Alternative Purchase Arrangements..................................................... 11
The Fund's Expenses................................................................... 12
Dividends and Taxes................................................................... 13
Performance........................................................................... 15
How to Buy Shares..................................................................... 16
Share Price........................................................................... 17
How to Redeem Shares.................................................................. 23
Additional Services and Programs...................................................... 24
Investments, Techniques and Risk Factors.............................................. 28
Appendix A............................................................................ A-1
</TABLE>
This Prospectus sets forth the information about John Hancock California
Tax-Free Income Fund (the "Fund"), a diversified fund, that you should know
before investing. Please read and retain it for future reference.
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the "SEC"). You can obtain a copy of the Fund's Statement
of Additional Information, dated May 1, 1995 and incorporated by reference into
this Prospectus, free of charge by writing or telephoning: John Hancock Investor
Services Corporation, P.O. Box 9116, Boston, Massachusetts 02205-9116,
1-800-225-5291 (1-800-554-6713 TDD).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 61
EXPENSE INFORMATION
The purpose of the following information is to help you to understand the
various fees and expenses you will bear, directly or indirectly, when you
purchase Fund shares. The operating expenses included in the table and
hypothetical example below are based on fees and expenses for the Fund's fiscal
year ended December 31, 1994 adjusted to reflect certain current expenses.
Actual fees and expenses in the future of Class A and Class B Shares may be
greater or less than those indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a percentage of offering price)............. 4.50% None
Maximum sales charge imposed on reinvested dividends...................................... None None
Maximum deferred sales charge............................................................. None* 5.00%
Redemption fee+........................................................................... None None
Exchange fee.............................................................................. None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fee............................................................................ 0.55% 0.55%
12b-1 fee (net of limitation, Class B Shares)***.......................................... 0.15% 0.90%
Other expenses**.......................................................................... 0.19% 0.19%
Less fee waiver and expense limitation by Adviser......................................... (0.14)% (0.14)%
Total Fund operating expenses (net of limitation)****..................................... 0.75% 1.50%
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, but for these investments a contingent deferred sales
charge may be imposed, as described below under the caption "Share Price,"
in the event of certain redemption transactions within one year of
purchase.
** Other Expenses include transfer agent, legal, audit, custody and other
expenses.
*** The amount of the 12b-1 fee for Class B Shares used to cover service
expenses will be up to 0.25% of the Fund's average net assets, and the
remaining portion will be used to cover distribution expenses.
**** Total Fund operating expenses in the table reflect voluntary and temporary
limitations by the Fund's investment adviser and distributor. Without these
limitations, the Total Fund operating expenses of Class A shares and Class
B shares would be 0.89% and 1.74%, respectively.
+ Redemption by wire fee (currently $4.00) not included.
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- ------------------------------------------------------------------------------------ ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses for the indicated period of years on a
hypothetical $1,000 investment, assuming 5% annual return
Class A Shares...................................................................... $ 52 $68 $ 85 $134
Class B Shares
-- Assuming complete redemption at end of period.................................. $ 65 $77 $ 102 $159
-- Assuming no redemption......................................................... $ 15 $47 $ 82 $159
(This example should not be considered a representation of past or future expenses. Actual expenses may be greater or lesser than
those shown.)
</TABLE>
The Fund's payment of a distribution fee may result in a long-term shareholder
indirectly paying more than the economic equivalent of the maximum front-end
sales charge permitted under the National Association of Securities Dealers,
Inc.'s Rules of Fair Practice.
The management and 12b-1 fees referred to above are more fully explained in
this Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the captions "Investment Advisory and Other
Services" and "Distribution Contract."
2
<PAGE> 62
THE FUND'S FINANCIAL HIGHLIGHTS
The following table of financial highlights has been audited by Ernst & Young
LLP, the Fund's independent auditors, whose unqualified report is included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's Annual Report to Shareholders
which may be obtained free of charge by writing or telephoning John Hancock
Investor Services Corporation ("Investor Services") at the address or telephone
number listed on the front page of this Prospectus.
Selected data for each class of shares outstanding throughout each period is
as follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
--------------------------------------------------------- -----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------------------------------- -----------------------------
1994 1993 1992(1) 1991 1990 1994 1993 1992(1)
-------- -------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE INCOME AND CAPITAL CHANGES
FOR A SHARE OUTSTANDING DURING EACH
YEAR:
Net asset value, beginning of year... $10.85 $10.41 $10.32 $ 9.91 $10.00 $10.85 $10.41 $10.32
INCOME FROM INVESTMENT OPERATIONS
Net investment income................ 0.58 0.62 0.66 0.69 0.74 0.51 0.54 0.58
Net realized and unrealized gain
(loss) on investments.............. (1.57) 0.76 0.25 0.47 (0.16) (1.57) 0.76 0.25
-------- -------- -------- -------- ------- ------- ------- -------
Total from Investment Operations..... (0.99) 1.38 0.91 1.16 0.58 (1.06) 1.30 0.83
LESS DISTRIBUTIONS
Dividends from net investment
income............................. (0.58) (0.62) (0.67) (0.70) (0.67) (0.51) (0.54) (0.59)
Distributions from realized gains.... -- (0.32) (0.15) (0.05) -- -- (0.32) (0.15)
-------- -------- -------- -------- ------- ------- ------- -------
Total Distributions.............. (0.58) (0.94) (0.82) (0.75) (0.67) (0.51) (0.86) (0.74)
-------- -------- -------- -------- ------- ------- ------- -------
Net asset value, end of year......... $ 9.28 $10.85 $10.41 $10.32 $ 9.91 $ 9.28 $10.85 $10.41
======== ======== ======== ======== ======= ======= ======= =======
TOTAL RETURN(2)...................... (9.31)% 13.60% 9.15% 12.26% 6.13% (9.99)% 12.76% 8.35%
======== ======== ======== ======== ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net
assets............................. 0.89% 0.87% 0.83% 0.80% 0.84% 1.64% 1.62% 1.60%
Ratio of expense limitation to
average net assets................. (0.14)% (0.18)% (0.25)% (0.40)% (0.84)% (0.14)% (0.18)% (0.25)%
-------- -------- -------- -------- ------- ------- ------- -------
Ratio of net expenses to average net
assets............................. 0.75% 0.69% 0.58% 0.40% 0.00% 1.50% 1.44% 1.35%
======== ======== ======== ======== ======= ======= ======= =======
Ratio of net investment income to
average net assets................. 5.85% 5.69% 6.36% 6.75% 7.11% 5.10% 4.82% 5.43%
Portfolio turnover................... 62% 51% 34% 45% 62% 62% 51% 34%
Net Assets, end of year (in
thousands)......................... $241,583 $279,692 $217,014 $163,693 $80,200 $77,365 $65,437 $26,595
</TABLE>
- ---------------
(1) Per share information has been calculated using the average number of shares
outstanding.
(2) Total return does not include the effect of the initial sales charge for
Class A Shares or the contingent deferred sales charge for Class B Shares.
Total return does include the benefit of a voluntary expense reimbursement
by the Adviser. Without such benefit, total return would be lower.
3
<PAGE> 63
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide as high a level of current income
exempt from both federal income taxes and California personal income taxes as is
consistent with preservation of capital. This objective may not be changed
without a vote of shareholders. The Fund pursues its objective by normally
investing substantially all of its assets in the following debt obligations
issued by or on behalf of the state of California, its political subdivisions,
municipalities, agencies, instrumentalities or public authorities and
obligations issued by other governmental entities (for example, certain U.S.
territories or possessions) the interest on which is excluded from gross income
for federal income tax purposes and is exempt from California personal income
taxes (collectively referred to as "California Tax Exempt Securities") subject
to the following quality standards:
- -------------------------------------------------------------------------------
THE FUND SEEKS TO PROVIDE INCOME THAT IS
EXCLUDABLE FROM FEDERAL AND CALIFORNIA
TAXES.
- -------------------------------------------------------------------------------
(1) Bonds which at the time of purchase are rated within one of the four highest
ratings (AAA, AA, A or BBB) by Standard and Poor's Ratings Group ("S&P") ,
Moody's Investor Services ("Moody's") (Aaa, Aa, A or Baa), or Fitch Investor
Services ("Fitch") (AAA, AA, A, BBB).
(2) Notes which at the time of purchase are rated within one of the two highest
ratings by S&P (SP-1 and SP-2), Moody's (MIG-1 and MIG-2) or Fitch (FIN-1
and FIN-2).
(3) Commercial paper which at the time of purchase is rated A-2 or higher by
S&P, P-2 or higher by Moody's, or F-2 or higher by Fitch.
(4) Participation interests, which are, at the time of purchase, rated A or
better by S&P, Moody's or Fitch or which are issued by an issuer whose
outstanding bonds are rated A or better.
(5) Unrated bonds, notes and commercial paper that in the opinion of the Adviser
are at the time of purchase comparable in quality to the rated obligations
of the same types described above, except that bonds must be comparable in
quality to those rated A or better provided that the Fund may not purchase
an unrated obligation which would cause more than 25% of its total assets to
be invested in unrated debt obligations.
(6) Other types of California Tax Exempt Securities, including variable and
floating rate obligations, which at the time of purchase, are rated within
the categories set forth above for bonds, notes or commercial paper or, if
unrated, are of the quality described in paragraph (5) above.
For a description of the tax exempt ratings described above, see Appendix A in
the Statement of Additional Information. Bonds rated BBB by S&P or Fitch, or Baa
by Moody's, are considered to have some speculative characteristics and, to
varying degrees, can pose special risks generally involving the ability of the
issuer to make payment of principal and interest to a greater extent than higher
rated securities. In addition, because the ratings and quality limitations on
the Fund's investments apply at the time of purchase, a subsequent change in the
rating or quality of a security held by the Fund would not require the Fund to
sell the security. John Hancock Advisers, Inc. (the "Adviser") will purchase
bonds rated BBB or
4
<PAGE> 64
Baa where, based upon price, yield and its assessment of quality, investment in
these bonds is determined to be consistent with the Fund's objective of
preservation of capital. They will evaluate and monitor the quality of all
investments, including bonds rated BBB or Baa, and will dispose of these bonds
as determined to be necessary to assure that the Fund's overall portfolio is
constituted in a manner consistent with the goal of preservation of capital. To
the extent that the Fund's investments in bonds rated BBB or Baa will emphasize
obligations believed to be consistent with the goal of preserving capital, these
obligations may not provide yields as high as those of other obligations having
these ratings, and the differential in yields between these bonds and
obligations with higher quality ratings may not be as significant as might
otherwise be generally available. Many issuers of securities choose not to have
their obligations rated. Although unrated securities eligible for purchase by
the Fund must be determined to be comparable in quality to securities having
certain specified ratings, the market for unrated securities may not be as broad
as for rated securities since many investors rely on rating organizations for
credit appraisal.
The Fund may invest in any combination of California Tax Exempt Securities;
however, it is expected that during normal investment conditions, a substantial
portion of the Fund's assets will be invested in municipal bonds (without regard
to maturities) and other longer-term obligations. When determined to be
appropriate, based upon market conditions, a substantial portion of the Fund's
holdings of California Tax Exempt Securities will consist of notes and
commercial paper and other shorter-term obligations. The Fund may invest up to
20% of its total assets in "private activity bonds" (meeting the quality
standards noted above), the interest on which may constitute a preference item
for purposes of determining the alternative minimum tax.
While as a fundamental investment policy, the Fund invests at least 80% of its
total assets in California Tax Exempt Securities (except during adverse market
conditions), the balance of its assets may be invested in the following
short-term investments: (1) obligations issued by or on behalf of states (other
than California), or the District of Columbia and their political subdivisions,
agencies or instrumentalities which meet the quality standards described above
but the interest on which is subject to California personal income tax ("Other
Tax Exempt Obligations"); (2) obligations issued or guaranteed by the U.S.
government, or one of its agencies or instrumentalities, the interest on which
is not exempt from federal income tax ("U.S. Government Securities"); (3)
corporate commercial paper meeting the quality standards noted above; (4)
certificates of deposit and bankers acceptances of domestic banks with assets of
$1 billion or more; and (5) repurchase agreements with respect to securities of
the type and quality in which the Fund may invest. The income from the foregoing
short-term investments may be subject to California and/or federal income taxes.
As a result, distributions of the Fund which are attributable to income from
investments in Other Tax Exempt Obligations will be subject to California
personal income tax; distributions attributable to U.S. Government Securities
will be subject to federal income tax; and distributions attributable to income
from repurchase agreements, corporate commercial paper, and certificates of
deposit will be subject to federal
5
<PAGE> 65
and California income taxes. The circumstances in which the Fund will normally
invest in these short-term investments are (1) pending the investment of
California Tax Exempt Securities or reinvestment of the proceeds of sales of
such securities or (2) to maintain liquidity and avoid the necessity of
liquidating portfolio investments at a disadvantageous time in order to meet
redemption requests.
As a defensive measure during times of adverse market conditions including when
sufficient California Tax Exempt Securities appropriate for investment by the
Fund are not available, the Fund may temporarily invest more than 20% of its
total assets in short term investments (previously described as Other Tax Exempt
Obligations, U.S. Government Securities, certificates of deposit and corporate
commercial paper) including investment grade corporate debt securities (which
meet the previously described quality standards), as long as at the end of each
quarter of its taxable year, these investments do not exceed 50% of the Fund's
total assets. The Fund will not be pursuing its objective of obtaining
tax-exempt income to the extent it invests in taxable securities. There can be
no assurance that the Fund will achieve its investment objective.
TAX EXEMPT SECURITIES. "Tax Exempt Securities" are debt obligations generally
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their political subdivisions, agencies or
instrumentalities the interest on which, in the opinion of the bond issuer's
counsel (not the Fund's counsel), is excluded from gross income for federal
income tax purposes and (in the case of California Tax Exempt Securities) exempt
from California personal income taxes. (See Discussion on Taxes.) These
securities consist of municipal bonds, municipal notes and municipal commercial
paper (see "Investment Objective and Policies" in the Statement of Additional
Information) as well as variable or floating rate obligations and participation
interests.
The two principal classifications of municipal obligations are general
obligations and revenue obligations. General obligations are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or in some cases from
the proceeds of a special excise or other tax. For example, industrial
development and pollution control bonds are in most cases revenue obligations
since payment of principal and interest is dependent solely on the ability of
the user of the facilities financed or the guarantor to meet its financial
obligations, and in certain cases, the pledge of real and personal property as
security for payment. The payment of principal and interest by issuers of
certain obligations purchased by the Fund may be guaranteed by a letter of
credit, note, repurchase agreement, insurance or other credit facility agreement
offered by a bank or other financial institution. These guarantees and the
creditworthiness of guarantors will be considered by the Adviser in determining
whether a municipal obligation meets the Fund's investment quality requirements.
No assurance can be given that a municipality or guarantor will be able to
satisfy the payment of principal or interest on a municipal obligation.
6
<PAGE> 66
The interest on bonds issued to finance essential state and local government
operations is fully tax-exempt under the Internal Revenue Code of 1986, as
amended (the "Code"). Interest on certain nonessential or private activity bonds
(including those for housing and student loans) issued after August 7, 1986,
while still tax-exempt, constitutes a tax preference item for taxpayers in
determining their alternative minimum tax: as a result, the Fund's distributions
attributable to such interest also constitute tax preference items. The Code
also imposes certain limitations and restrictions on the use of tax-exempt bond
financing for non-governmental business activities, such as industrial
development bonds.
FUND CHARACTERISTICS. Because the Fund will ordinarily invest at least 80% of
its assets in California Tax Exempt Securities, its portfolio is more
susceptible to factors affecting these securities than is a tax-exempt mutual
fund not investing primarily in the obligations of a single state. (See "Risk
Factors" and "Investments, Techniques and Risk Factors".)
The Fund may write (sell) covered call and put options on debt securities in
which it may invest and on indices composed of debt securities in which it may
invest. It may purchase call and put options on these securities and indices. It
may also write straddles, which are combinations of put and call options on the
same security. The Fund may buy and sell interest rate and municipal bond index
futures contracts, and options on these futures contracts, to hedge against
changes in securities prices and interest rates. The Fund may invest in variable
rate and floating rate obligations, including inverse floating rate obligations,
on which the interest rate is adjusted at predesignated periodic intervals or
when there is a change in the market rate of interest on which the interest rate
payable on the obligation is met is based. Options, futures contracts and
variable and floating rate instruments are generally considered to be
"derivative" instruments, because they derive their value from the performance
of an underlying asset, index or other economic benchmark. See "Investments,
Techniques and Risk Factors" for additional discussion of derivative
instruments.
- -------------------------------------------------------------------------------
THE FUND MAY EMPLOY CERTAIN INVESTMENT
STRATEGIES TO HELP ACHIEVE ITS INVESTMENT
OBJECTIVE.
- -------------------------------------------------------------------------------
The Fund will not concentrate in any one industry (governmental issuers are not
considered to be part of any "industry"). While the Fund may invest more than
25% of its total assets in industrial development or pollution control bonds, it
may not invest more than 25% of its assets in industrial development or
pollution control bonds which are dependent, directly or indirectly, on the
revenues or credit of private entities in any one industry.
The Fund may purchase tax exempt participation interests and municipal lease
obligations, may lend its portfolio securities, enter into repurchase
agreements, purchase restricted and illiquid securities and purchase securities
on a when-issued or forward commitment basis.
See "Investments, Techniques and Risk Factors" for more information about the
Fund's investments.
7
<PAGE> 67
The Fund has adopted certain investment restrictions which are enumerated in
detail in the Statement of Additional Information, where they are classified as
fundamental or nonfundamental. Those restrictions designated as fundamental may
not be changed without shareholder approval. The Fund's investment objective and
its policy to invest (under normal market conditions) 80% of its total assets in
California Tax-Exempt securities are fundamental and may not be changed without
the approval of the Fund's shareholders. The Fund's other investment policies
and its nonfundamental restrictions, however, may be changed by a vote of the
Trustees without shareholder approval. Notwithstanding the Fund's fundamental
investment restriction prohibiting investments in other investment companies,
the Fund may, pursuant to an order granted by the SEC, invest in other
investment companies in connection with a deferred compensation plan for the
non-interested trustees of the John Hancock Group of Funds. There can be no
assurance that the Fund will achieve its investment objective.
- -------------------------------------------------------------------------------
THE FUND FOLLOWS CERTAIN POLICIES THAT MAY
HELP TO REDUCE INVESTMENT RISK.
- -------------------------------------------------------------------------------
RISK FACTORS. An investment in the Fund is intended for long-term investors who
can accept the risks associated with investing primarily in fixed-income
securities. The Fund's investments will be subject to market fluctuation and
other risks inherent in all securities. The Fund's yield, return and price
volatility depend on the type and quality of its investments as well as market
and other factors. In addition, the Fund's potential investments and management
techniques may entail specific risks. For additional information about risks
associated with an investment in the Fund, see "Investments, Techniques and Risk
Factors."
The following information as to certain California risk factors is given in view
of the fact that the Fund's ability to achieve its investment objective depends
upon the ability of the issuers of California Tax Exempt Securities to meet
their continuing obligations for the payment of principal and interest. For a
more complete discussion, you may refer to the Statement of Additional
Information.
In 1978, California passed Proposition 13, limiting the level of property taxes.
This and subsequent legislation limiting taxation and spending may affect the
creditworthiness of the state or local agencies in the future. If either
California or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Fund, its net asset value, its
ability to preserve or realize capital appreciation or its liquidity could be
adversely affected.
On December 6, 1994, Orange County, California (the "County"), together with its
pooled investment funds (the "O.C. Pools"), filed for protection under Chapter 9
of the federal Bankruptcy Code. This filing occurred after reports that the O.C.
Pools had suffered significant market losses in their investments caused a
liquidity crisis for the O.C. Pools and the County. Approximately 180 other
public entities, most but not all located in the County, were also depositors in
the O.C. Pools. As of mid-January, 1995, after the O.C. Pools were restructured
to reduce their risk exposure, the County estimated that the O.C. Pools had lost
about $1.7 billion or 22% of their initial deposits of around $7.5 billion. Many
of the entities that kept moneys in the O.C. Pools, including the County, are
facing cash flow difficulties because of the bankruptcy filing and may be
required to reduce programs or capital projects. The County and some of these
entities have defaulted, and others may
8
<PAGE> 68
default in the future, in payment of their obligations. Moody's and S&P have
suspended, reduced to below investment grade levels, or placed on "Credit Watch"
various securities of the County and the entities participating in the Fund. As
of April 6, 1995, 1.08% of the Fund's total net assets was invested in
obligations arising from the O.C. Pools.
The State of California has no existing obligation with respect to any
obligations or securities of the County or any of the other participating
entities. However, the State may be obligated to intervene to ensure that school
districts have sufficient funds to operate, or maintain certain
county-administered State programs.
The recession starting in mid-1990 was the deepest and longest in California
since the 1930's and caused a sharp drop in State revenues. As a result, the
State accumulated a budget deficit of almost $3 billion at its peak at June 30,
1992. Each budget in the last four years has required the Governor and
Legislature to undertake multibillion dollar cuts in program expenditures,
transfers of fiscal responsibilities to local governments, various one-time
adjustments, accounting changes and tax increases in an effort to balance
revenues and expenditures. The difficulties in reaching a consensus approach to
this persistent imbalance produced a two-month delay in passing the June 1992
budget, which forced the State to issue registered warrants to pay its bills. In
July 1994, the State passed a budget which proposed eliminating the accumulated
budget deficit of about $1.8 billion by the end of the Fiscal Year 1995-96.
The persistent budget deficits, combined with about $1.7 billion of off-budget
payments made to schools and reductions of internally borrowable funds, severely
depleted the State's cash resources, so that it has had to resort to repeated
external borrowing to meet its cash needs since 1992. In order to meet cash flow
requirements for the 1994-95 fiscal year and to defer payment of part of the
budget deficit, the State issued $7 billion of short-term securities in July and
August 1994, of which $4 billion mature in April 1996. To assure repayment of
this borrowing, the State enacted legislation which can lead to automatic,
across-the-board cuts in certain General Fund expenditures in the 1995-96 fiscal
year if cash flow projections made in October 1995 show deterioration from
projections made in July 1994 when the borrowings were made. This plan places
the burden upon the Legislature to maintain ongoing control over the annual
budget, and could place additional financial pressure on local governments'
reliance on program expenditures. The State will continue to have to rely on
access to the short-term debt markets to meet its cash flow requirements in the
foreseeable future.
The California economy has shown steady growth since the start of 1994. After
four consecutive years of on-going job losses, company relocations out of state,
and unemployment rates exceeding 9% at times, the State has registered net job
growth. Over the next two years, modest growth is expected to continue with the
economy generating momentum going into 1996. After recovering from the losses
inflicted by the January 1994 Los Angeles earthquake, personal income is
expected to rebound in 1995. Any setbacks to this recovery could lead to weaker
than expected collections of State and local revenues and continued budget
pressures.
9
<PAGE> 69
As a result of the ongoing budget imbalance, growing deficits and sluggish
recovery, the State credit ratings have been recently downgraded. In July, 1994,
both Moody's and S&P lowered their credit ratings on California General
Obligation debts. Moody's dropped its Aa ratings to A1 and Standard & Poor's
reduced A+ ratings to A. Fitch Investors Service also lowered the State's rating
from Aa to A. Continued financial stress and failure by the State to directly
address its deficit could lead to further downgrades.
The primary consideration in choosing brokerage firms to carry out the Fund's
transactions is execution at the most favorable prices, taking into account the
broker's professional ability and quality of service. Consideration may also be
given to the broker's sales of Fund shares. Pursuant to procedures determined by
the Trustees, John Hancock Advisers, Inc. (the "Adviser") may place securities
transactions with brokers affiliated with the Adviser. The brokers include
Tucker Anthony Incorporated, Sutro and Company, Inc. and John Hancock
Distributors, Inc., which are indirectly owned by the John Hancock Mutual Life
Insurance Company (the "Life Company"), which in turn indirectly owns the
Adviser.
- -------------------------------------------------------------------------------
BROKERS ARE CHOSEN ON BEST PRICE AND
EXECUTION.
- -------------------------------------------------------------------------------
ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund is a diversified open-end management investment company organized as a
Massachusetts business trust in 1990. The Fund reserves the right to create and
issue a number of series of shares, or funds or classes thereof, which are
separately managed and have different investment objectives. The Fund is not
required to and does not intend to hold annual meetings of shareholders,
although special meetings may be held for such purposes as electing or removing
Trustees, changing fundamental policies or approving a management contract. The
Fund, under certain circumstances, will assist in shareholder communications
with other shareholders.
- -------------------------------------------------------------------------------
THE TRUSTEES ELECT OFFICERS AND RETAIN THE
INVESTMENT ADVISER WHO IS RESPONSIBLE FOR
THE DAY-TO-DAY OPERATIONS OF THE FUND,
SUBJECT TO THE TRUSTEES' POLICIES AND
SUPERVISION.
- -------------------------------------------------------------------------------
The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the John Hancock Mutual Life Insurance Company, a financial services company.
The Adviser provides the Fund, and other investment companies in the John
Hancock group of funds, with investment research and portfolio management
services. John Hancock Funds Inc., ("John Hancock Funds") distributes shares for
all of the John Hancock mutual funds through Selling Brokers. Certain Fund
officers are also officers of the Adviser and John Hancock Funds. Pursuant to an
order of the SEC, the Fund has adopted a deferred compensation plan for its
independent Trustees which allows Trustees' fees to be invested by the Fund in
other John Hancock funds.
- -------------------------------------------------------------------------------
JOHN HANCOCK ADVISERS, INC. ADVISES
INVESTMENT COMPANIES HAVING A TOTAL ASSET
VALUE OF APPROXIMATELY $13 BILLION.
- -------------------------------------------------------------------------------
All investment decisions are made by the Adviser's fixed-income portfolio
management team and no single person is primarily responsible for making
recommendations to the team.
In order to avoid any conflict with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
preclearance for all personal trades and a ban on the purchase of initial public
10
<PAGE> 70
offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
ALTERNATIVE PURCHASE ARRANGEMENTS
You can purchase shares of the Fund at a price equal to their net asset value
per share plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge Alternative,"
Class A shares) or on a contingent deferred basis (the "Contingent Deferred
Sales Charge Alternative," Class B shares). If you do not specify on your
account application the class of shares you are purchasing, it will be assumed
that you are investing in Class A shares.
CLASS A SHARES. If you elect to purchase Class A shares, you will incur an
initial sales charge unless the amount of your purchase is $1 million or more.
If you purchase $1 million or more of Class A shares, you will not be subject to
an initial sales charge, but you will incur a sales charge if you redeem your
shares within one year of purchase. Class A shares are subject to ongoing
distribution and service fees at a combined annual rate of up to 0.15% of the
Fund's average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Share Price -- Qualifying for a Reduced Sales Charge."
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS A SHARES ARE SUBJECT
TO AN INITIAL SALES CHARGE.
- -------------------------------------------------------------------------------
CLASS B SHARES. You will not incur a sales charge when you purchase Class B
shares, but the shares are subject to a sales charge if you redeem them within
six years of purchase (the "contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
combined annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class B shares. Investing in Class B shares permits all of
your dollars to work from the time you make your investment, but the higher
ongoing distribution fee will cause these shares to have higher expenses than
those of Class A shares. To the extent that any dividends are paid by the Fund,
these higher expenses will also result in lower dividends than those paid on
Class A shares.
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS B SHARES ARE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE.
- -------------------------------------------------------------------------------
Class B shares are not available for full-service defined contribution plans
administered by Investor Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
FACTORS TO CONSIDER IN CHOOSING AN ALTERNATIVE
The alternative purchase arrangement allows you to choose the most beneficial
way to buy shares, given the amount of your purchase, the length of time you
expect to hold your shares and other circumstances. You should consider whether,
during the anticipated life of your Fund investment, the CDSC and accumulated
fees on Class B shares would be less than the initial sales charge and
accumulated fees on Class A shares purchased at the same time, and to what
extent this differential would be offset by the Class A shares' lower expenses.
To help you make this determination, the table under the caption "Expense
Information" on the
- -------------------------------------------------------------------------------
YOU SHOULD CONSIDER WHICH CLASS OF SHARES
WOULD BE MORE BENEFICIAL TO YOU.
- -------------------------------------------------------------------------------
11
<PAGE> 71
inside cover page of this Prospectus shows examples of the charges applicable
to each class of shares. Class A shares will normally be more beneficial if you
qualify for reduced sales charges. See "Share price -- Qualifying for a
Reduced Sales Charge."
Class A shares are subject to lower distribution fees and, accordingly, pay
correspondingly higher dividends per share, to the extent any dividends are
paid. However, because initial sales charges are deducted at the time of
purchase, you would not have all of your funds invested initially and,
therefore, would initially own fewer shares. If you do not qualify for reduced
initial sales charges and expect to maintain your investment for an extended
period of time, you might consider purchasing Class A shares. This is because
the accumulated distribution and service charges on Class B shares may exceed
the initial sales charge and accumulated distribution and service charges on
Class A shares during the life of your investment.
Alternatively, you might determine that it is more advantageous to purchase
Class B shares to have all of your funds invested initially. However, you will
be subject to higher distribution and service fees and, for a six-year period, a
CDSC.
In the case of Class A shares, the distribution expenses that John Hancock
Funds, incurs in connection with the sale of the shares will be paid from the
proceeds of the initial sales charge and ongoing distribution and service fees.
In the case of Class B shares, the expenses will be paid from the proceeds of
the ongoing distribution and service fees, as well as from the CDSC incurred
upon redemption within six years of purchase. The purpose and function of the
Class B shares' CDSC and ongoing distribution and service fees are the same as
those of the Class A shares' initial sales charge and ongoing distribution and
service fees. Sales personnel distributing the Fund's shares may receive
different compensation for selling each class of shares.
Dividends, if any, on Class A and Class B shares will be calculated in the same
manner, at the same time and on the same day. They also will be in the same
amount, except for differences resulting from each class bearing only its own
distribution and service fees, shareholder meeting expenses and any incremental
transfer agency costs. See "Dividends and Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a monthly fee to
the Adviser. During the Fund's most recent fiscal year, the advisory fee was
.55% of the Fund's average daily net assets. The Adviser has voluntarily and
temporarily agreed to continue to limit the Fund's operating expenses to 0.75%
and 1.50% of the average net assets attributable to Class A and Class B shares,
respectively.
The Class A and Class B shareholders have adopted distribution plans (each a
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). Under these Plans, the Fund will pay distribution and service fees
at an aggregate annual rate of up to 0.15% of the Class A shares' average daily
net assets and an aggregate annual rate of 1.00% of the Class B shares' average
daily
- -------------------------------------------------------------------------------
THE FUND PAYS DISTRIBUTION AND SERVICE
FEES FOR MARKET-
ING AND SALES-RELATED
SHAREHOLDER SERVICING.
- -------------------------------------------------------------------------------
12
<PAGE> 72
net assets. John Hancock Funds has temporarily agreed to limit the
distribution and services fees pursuant to the Class B Plan to 0.90% of average
daily net assets. Up to 0.25% for Class B shares and 0.15% for Class A shares is
for service expenses and the remaining amount is for distribution expenses. The
distribution fees will be used to reimburse John Hancock Funds for its
distribution expenses, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others (including affiliates of John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
and overhead expenses incurred in connection with the distribution of Fund
shares; (iii) unreimbursed distribution expenses under the Fund's prior
distribution plans; (iv) distribution expenses incurred by other investment
companies which sell all or substantially all of their assets to, merge or
otherwise engage in a reorganization transaction with the Fund; and (v) with
respect to Class B shares only, interest expenses on unreimbursed distribution
expenses. The service fees will be used to compensate Selling Brokers for
providing personal and account maintenance services to shareholders.
In the event John Hancock Funds is not fully reimbursed for payments it makes or
expenses it incurs under the Class A Plan, these expenses will not be carried
beyond one year from the date they were incurred. Unreimbursed expenses under
the Class B Plan will be carried forward together with interest on the balance
of these unreimbursed expenses. For the fiscal year ended December 31, 1994, an
aggregate of $3,602,288 of distribution expenses or 4.66% of the average net
assets of the Fund's Class B shares was not reimbursed or recovered by John
Hancock Funds through the receipt of deferred sales charges or Rule 12b-1 fees
in prior periods.
Information on the Fund's total expenses is in the Fund Financial Highlights
section of this Prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund generally declares dividends daily and distributes them
monthly, representing all or substantially all of its net investment income. The
Fund will distribute net realized long-term and short-term capital gains, if
any, annually before the close of the calendar year.
- -------------------------------------------------------------------------------
THE FUND GENERALLY DECLARES DIVIDENDS
DAILY AND DISTRIBUTES THEM MONTHLY.
- -------------------------------------------------------------------------------
Dividends are reinvested in additional shares of your class unless you elect the
option to receive them in cash. If you elect the cash option and the U.S. Postal
Service cannot deliver your checks, your election will be converted to the
reinvestment option. Because of the higher expenses associated with Class B
shares, any dividends on these shares will be lower than those on the Class A
shares. See "Share Price."
TAXATION. The Fund intends to meet certain federal tax requirements so that its
distributions of the tax-exempt interest it earns may be treated as
"exempt-interest dividends," which you are entitled to treat as tax-exempt
interest. That portion of exempt-interest dividends, if any, attributable to
interest on certain tax-exempt obligations that are "private activity bonds" may
increase certain shareholders'
13
<PAGE> 73
alternative minimum tax. Any exempt-interest dividend may increase a corporate
shareholder's alternative minimum tax.
Shareholders receiving social security benefits and certain railroad retirement
benefits may be subject to Federal income tax on up to 85 percent of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Fund. Shares
of the Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by industrial development or private
activity bonds, or persons related to "substantial users." Consult your tax
adviser if you think this may apply to you.
Dividends from the Fund's net taxable income, if any, including any market
discount included in the Fund's income, and from the Fund's net short-term
capital gains are taxable to you as ordinary income. Dividends from the Fund's
net long-term capital gains are taxable as long-term capital gain. These
dividends are taxable, whether received in cash or reinvested in additional
shares. Certain dividends may be paid by the Fund in January of a given year but
may be treated as if you received them the previous December.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the Fund will not be
subject to Federal income tax on any net investment income or net realized
capital gains distributed to its shareholders within the time period prescribed
by the Code. When you redeem (sell) or exchange shares, you may realize a
taxable gain or loss.
On the account application you must certify that the social security or other
tax payer identification number you provide is your correct number and that you
are not subject to backup withholding of Federal income tax. If you do not
provide this information or are otherwise subject to this withholding, the Fund
may be required to withhold 31% of your taxable dividends and the proceeds of
redemptions or exchanges.
The Fund intends to comply with certain California tax requirements so that
dividends paid by the Fund which are derived from interest on obligations, the
interest on which is exempt from California income tax, will be exempt from
California personal income tax in the hands of shareholders of the Fund.
Dividends from other sources, including capital gain dividends, if any, will not
be exempt from California personal income tax. Dividends paid by the Fund are
not exempt from California franchise or corporate income taxes. California does
not treat tax-exempt interest (or dividends paid by the Fund attributable to
such interest) as a tax preference item for purposes of its alternative minimum
tax.
The foregoing relates to federal income taxation and to California personal
income taxation as in effect as of the date of this Prospectus. Distributions
from investment income and capital gains, including exempt-interest dividends,
may be subject to California franchise taxes if received by a corporation doing
business in California, to state taxes in states other than California and to
local taxes. You should consult your tax adviser for specific advice.
14
<PAGE> 74
PERFORMANCE
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30-day period by the maximum
offering price per share on the last day of that period. Yield is also
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the Fund's yield may not equal the income paid on
shares or the income reported in the Fund's financial statements.
- -------------------------------------------------------------------------------
THE FUND MAY ADVERTISE ITS YIELD, TAX
EQUIVALENT YIELD AND TOTAL RETURN.
- -------------------------------------------------------------------------------
Tax-equivalent yield is computed by dividing that portion of the yield of the
Fund which is tax-exempt by one minus a stated income tax rate and then adding
the product to any portion of the Fund's yield that is not tax-exempt.
Total return is based on the overall change in value of a hypothetical
investment in the Fund. Both total return and yield calculations for Class A
shares generally include the effect of paying the maximum sales charge of 4.5%.
Investments at a lower sales charge would achieve higher returns than those
advertised. The value of Fund shares, when redeemed, may be more or less than
their original cost. Both yield and total return are historical calculations,
and are not an indication of future performance.
The Fund's total return shows the overall dollar or percentage change in value
of a hypothetical investment in the Fund, assuming the reinvestment of all
dividends. Cumulative total return shows the Fund's performance over a period of
time. Average annual total return shows the cumulative return divided over the
number of years included in the period. Because average annual total return
tends to smooth out variations in the Fund's performance, you should recognize
that it is not the same as actual year-to-year results.
15
<PAGE> 75
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
The minimum initial investment in Class A and Class B Shares is $1,000
($250 fo group investments and retirement plans). Complete the Account
Application attached to this Prospectus. Indicate whether you are
purchasing Class A or Class B shares. If you do not specify which class of
shares you are purchasing, Investor Services will assume that you are
investing in Class A shares.
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------
BY CHECK 1. Make your check payable to John Hancock Investor Services
Corporation ("Investor Services") P.O. Box 9115, Boston, MA
02205-9115.
2. Deliver the completed application and check to your registered
representative or a broker with an agreement with John Hancock
Funds ("Selling Broker") or mail it directly to Investor
Services.
- ---------------------------------------------------------------------------------
BY WIRE 1. Obtain an account number by contacting your registered
representative or Selling Broker, or by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock California Tax-Free Income Fund
Class A or Class B shares
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered
representative or Selling Broker or mail it directly to
Investor Services.
- ---------------------------------------------------------------------------------
1. Complete the "Automatic Investing" and "Bank Information" sections on
MONTHLY the Account Privileges Application, designating a bank account from
AUTOMATIC which funds may be drawn.
ACCUMULATION 2. The amount you elect to invest will be automatically withdrawn from
PROGRAM your bank or credit union account.
(MAAP)
</TABLE>
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A
AND CLASS B SHARES.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
BY TELEPHONE 1. Complete the "Invest-by-Phone" and "Bank Information" sections
on the Account Privileges Application, designating a bank
account from which your funds may be drawn. Note that in order
to invest by phone, you must be in a bank or credit union that
is a member of the Automated Clearing House system (ACH).
2. After your authorization form has been processed, you may
purchase additional Class A and Class B shares by calling
Investor Services toll-free at 1-800-225-5291.
3. Give the Investor Services representative the name in which
your account is registered, the Fund name, the class of shares
you own, your account number, and the amount you wish to
invest.
4. Your investment normally will be credited to your account the
business day following your phone request.
- ---------------------------------------------------------------------------------
BY CHECK 1. Either complete the detachable stub included in your account
statement or include a note with your investment listing the
name of the Fund, the class of shares you own, your account
number and the name(s) in which the account is registered.
2. Make your check payable to John Hancock Investor Services
Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or Selling
Broker.
- ---------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 76
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE Instruct your bank to wire funds to:
</TABLE>
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A AND CLASS B
SHARES.
(CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock California Tax-Free Income Fund
(Class A or Class B shares)
Your Account Number
Name(s) under which account is registered
- -------------------------------------------------------------------------------
</TABLE>
Other Requirements. All purchases must be made in U.S. dollars. Checks
written on foreign banks will delay purchases until U.S. funds are received,
and a collection charge may be imposed. Shares of the Fund are priced at the
offering price based on the net asset value computed after Investor Services
receives notification of the dollar equivalent from the Fund's custodian bank.
Wire purchases normally take two or more hours to complete and, to be accepted
the same day, must be received by 4:00 p.m., New York time. Your bank may
charge a fee to wire funds. Telephone transactions are recorded to verify
information. Certificates are not issued unless a request is made in writing to
Investor Services.
- -------------------------------------------------------------------------------
You will receive a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
- -------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS, THAT
YOU SHOULD KEEP TO HELP WITH YOUR
PERSONAL RECORDKEEPING.
- -------------------------------------------------------------------------------
SHARE PRICE
The net asset value per share ("NAV") is the value of one share. The NAV is
calculated by dividing the net assets of each class by the number of outstanding
shares of that class. The NAV of each class can differ in value. Securities in
the Fund's portfolio are valued on the basis of market quotations, valuations
provided by independent pricing services or, at fair value as determined in good
faith according to procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost which the
Trustees have determined approximates market value. If quotations are not
readily available, assets are valued by a method that the Trustees believe
accurately reflects fair value. The NAV is calculated once daily as of the close
of regular trading on the New York Stock Exchange (the "Exchange") (generally at
4:00 P.M., New York time) on each day that the Exchange is open.
- -------------------------------------------------------------------------------
THE OFFERING PRICE OF YOUR SHARES IS THEIR
NET ASSET VALUE PLUS A SALES CHARGE,
IF APPLICABLE, WHICH WILL
VARY WITH THE PURCHASE
ALTERNATIVE YOU CHOOSE.
- -------------------------------------------------------------------------------
Shares of the Fund are sold at the offering price based on the NAV computed
after your investment request is received in good order by John Hancock Funds.
If you buy shares of the Fund through a Selling Broker, the Selling Broker must
receive your investment before the close of regular trading on the Exchange and
transmit it to John Hancock Funds before its close of business to receive that
day's offering price.
17
<PAGE> 77
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge as follows:
<TABLE>
<CAPTION>
COMBINED REALLOWANCE
REALLOWANCE TO SELLING
AND SERVICE BROKERS AS A
FEE AS A PERCENTAGE
SALES CHARGE AS SALES CHARGE AS PERCENTAGE OF THE
AMOUNT INVESTED A PERCENTAGE OF A PERCENTAGE OF OF OFFERING OFFERING
(INCLUDING SALES CHARGE) OFFERING PRICE THE AMOUNT INVESTED PRICE(+) PRICE(*)
- ----------------------------------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C>
Less than $100,000........ 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999...... 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999...... 2.75% 2.83% 2.30% 2.06%
$500,000 to $999,999...... 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over....... 0.00%(**) 0.00%(**) (***) 0.00%(***)
</TABLE>
(*) Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales
charge. In addition to the reallowance allowed to all selling Brokers,
John Hancock Funds will pay the following: round trip airfare to a resort
will be offered to each registered representative of a Selling Broker (if
the Selling Broker has agreed to participate) who sells certain amounts of
shares of John Hancock funds. John Hancock Funds will make these incentive
payments out of its own resources. Other than distribution and service
fees, the Fund does not bear distribution expenses. A Selling Broker to
whom substantially the entire sales charge is reallowed or who receives
these incentives may be deemed to be an underwriter under the Securities
Act of 1933.
(**) No sales charge is payable at the time of purchase in Class A shares of $1
million or more, but a CDSC may be imposed in the event of certain
redemption transactions within one year of purchase.
(***) John Hancock Funds may pay a commission and the first year's service fee
(as described in (+) below) to Selling Brokers who initiate and are
responsible for purchases of $1 million or more in the aggregate as
follows: 1% on sales to $4,999,999, 0.50% on the next $5 million and 0.25%
on amounts of $10 million and over.
(+) At the time of sale, John Hancock Funds pays to Selling Brokers the first
year's service fee in advance in an amount equal to 0.25% of the net
assets invested in the Fund. Thereafter, it pays the service fee
periodically in arrears in an amount up to 0.25% of the Fund's average
annual net assets. Selling Brokers receive the fee as compensation for
providing personal and account maintenance services to shareholders.
Sales charges ARE NOT APPLIED to any dividends that are reinvested in additional
Class A shares of the Fund.
John Hancock Funds will pay certain affiliated Selling Brokers at an annual rate
of up to 0.05% of the daily net assets of accounts attributable to these
brokers.
Under certain circumstances described below, investors in Class A shares may be
entitled to pay reduced sales charges. See "Qualifying for a Reduced Sales
Charge" below.
CONTINGENT DEFERRED SALES CHARGE -- INVESTMENTS OF $1 MILLION OR MORE IN CLASS A
SHARES. Purchases of $1 million or more of Class A shares will be made at net
asset value with no initial sales charge, but if the shares are redeemed within
18
<PAGE> 78
12 months after the end of the calendar month in which the purchase was made
(the CDSC period), a CDSC will be imposed. The rate of the CDSC will depend on
the amount invested as follows:
<TABLE>
<CAPTION>
AMOUNT INVESTED CDSC RATE
- ---------------------------------------------------------------------- ---------
<S> <C>
$1 million to $4,999,999.............................................. 1.00%
Next $5 million to $9,999,999......................................... 0.50%
Amounts of $10 million and over....................................... 0.25%
</TABLE>
Existing full-service clients of the Life Company who were group annuity
contract holders as of September 1, 1994 and participant-directed defined
contribution plans with at least 100 eligible employees at the inception of the
Fund account may purchase Class A shares with no initial sales charge. However,
if the shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the above rate .
The CDSC will be assessed on an amount equal to the lesser of the current market
value or the original purchase cost of the Class A shares that have been
redeemed. Accordingly, no CDSC will be imposed on increases in account value
above the initial purchase price, including any distributions which have been
reinvested in additional Class A shares.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
Therefore, it will be assumed that the redemption is first made from any shares
in your account that are not subject to the CDSC. The CDSC is waived on
redemptions in certain circumstances. See "Waiver of Contingent Deferred Sales
Charge" below.
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in
Class A shares of the Fund or a combination of funds within the John Hancock
family of funds (except money market funds), you may qualify for a reduced sales
charge on your investments in Class A shares through a LETTER OF INTENTION. You
may also be able to use the ACCUMULATION PRIVILEGE and the COMBINATION PRIVILEGE
to take advantage of the value of your previous investments in Class A shares of
the John Hancock funds in meeting the breakpoints for a reduced sales charge.
For the ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE, the applicable sales
charge will be based on the total of:
- -------------------------------------------------------------------------------
YOU MAY QUALIFY FOR A
REDUCED SALES CHARGE ON
YOUR INVESTMENT IN CLASS A SHARES.
- -------------------------------------------------------------------------------
1. Your current purchase of Class A shares of the Fund.
2. The net asset value (at the close of business on the previous day) of (a) all
Class A shares of the Fund you hold, and (b) all Class A shares of any other
John Hancock funds you hold; and
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
19
<PAGE> 79
EXAMPLE:
If you hold Class A shares of a John Hancock fund with a net asset value of
$80,000 and subsequently invest $20,000 in Class A shares of the Fund, the sales
charge on this subsequent investment would be 3.75% and not 4.50% (the rate that
would otherwise be applicable to investments of less than $100,000.) See
"Initial Sales Charge alternative -- Class A Shares."
If you are in one of the following categories, you may purchase Class A shares
of the Fund without paying a sales charge:
- - A Trustee/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family of any of
the foregoing; or any Fund, pension, profit sharing or other benefit plan for
the individuals described above.
- - Any state, county, city or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any registered
investment management company.*
- - A bank, trust company, credit union, savings institution or other type of
depository institution, its trust departments or common trust funds if it is
purchasing $1 million or more for non-discretionary customers or accounts.*
- - A broker, dealer or registered investment adviser that has entered into an
agreement with John Hancock Funds providing specifically for the use of Fund
shares in fee-based investment products made available to their clients.
- - A former participant in an employee benefit plan with John Hancock Funds, when
he/she withdraws from his/her plan and transfers any or all of his/her plan
distributions directly to the Fund.
- ---------------
* For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Class A Shares of the Fund may be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES. Class B shares
are offered at net asset value per share without a sales charge so that your
entire initial investment will go to work at the time of purchase. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the rates set forth below. This charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
shares being redeemed. Accordingly, you will not be assessed a CDSC on increases
in account value above the initial purchase price, including shares derived from
dividend reinvestment.
20
<PAGE> 80
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
reinvestment of dividends and next from the shares you have held the longest
during the six-year period. The CDSC is waived on redemptions in certain
circumstances. See the discussion "Waiver of Contingent Deferred Sales Charge"
below.
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time, your CDSC will be calculated as follows:
<TABLE>
<S> <C>
- - Proceeds of 50 shares redeemed at $12 per share $600
- - Minus proceeds of 10 shares not subject to CDSC because they were -120
acquired through dividend reinvestment (10 X $12)
- - Minus appreciation on remaining shares, also not subject to CDSC -80
(40 X $2)
-----
- - Amount subject to CDSC $400
</TABLE>
Proceeds from the CDSC are paid to John Hancock Funds. John Hancock Funds uses
all or part of them to defray its expenses related to providing the Fund with
distribution services connected to the sale of Class B shares, such as
compensating Selling Brokers for selling these shares. The combination of the
CDSC and the distribution and service fees makes it possible for the Fund to
sell Class B shares without deducting a sales charge at the time of the
purchase.
The amount of the CDSC, if any, will vary depending on the number of years from
the time you purchase your Class B shares until the time you redeem them. Solely
for the purposes of determining the holding period, any payments you make during
the month will be aggregated and deemed to have been made on the last day of the
month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR IN WHICH CLASS B SHARES DOLLAR AMOUNT SUBJECT TO
REDEEMED FOLLOWING PURCHASE CDSC
- ---------------------------------------------------- ---------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
A commission equal to 3.75% of the amount invested and a first year's service
fee equal to 0.25% of the amount invested are paid to Selling Brokers. The
initial service fee is paid in advance at the time of sale for the provision of
personal and account maintenance services to shareholders during the twelve
months following the sale, and thereafter the service fee is paid in arrears.
21
<PAGE> 81
WAIVER OF CONTINGENT DEFERRED SALES CHARGES. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in these circumstances:
- - Redemptions of Class B shares made under Systematic Withdrawal Plan (see "How
to Redeem Shares"), as long as your annual redemptions do not exceed 10% of
your account value at the time you established your Systematic Withdrawal
Plan, and 10% of the value of your subsequent investments (less redemptions)
in that account at the time you notify Investor Services. This waiver does not
apply to Systematic Withdrawal Plan redemptions of Class A shares that are
subject to a CDSC.
- -------------------------------------------------------------------------------
UNDER CERTAIN CIRCUMSTANCES, THE CDSC ON
CLASS B AND CERTAIN CLASS A SHARE
REDEMPTIONS WILL BE WAIVED.
- -------------------------------------------------------------------------------
- - Redemptions made to effect distributions from an Individual Retirement Account
either before or after age 59 1/2, as long as the distributions are based on
the life expectancy of the joint-and-last survivor life expectancy of you and
your beneficiary. These distributions must be free from penalty under the
Code.
- - Redemptions made to effect mandatory distributions under the Code after age
70 1/2 from a tax-deferred retirement plan.
- - Redemptions made to effect distributions to participants or beneficiaries from
certain employer-sponsored retirement plans including those qualified under
Section 401(a) of the Code, custodial accounts under Section 403(b)(7) of the
Code and deferred compensation plans under Section 457 of the Code. The waiver
also applies to certain returns of excess contributions made to these plans.
In all cases, the distributions must be free from penalty under the Code.
- - Redemptions due to death or disability.
- - Redemptions made under the Reinvestment Privilege, as described in "Additional
Services and Programs" of this Prospectus.
- - Redemptions made pursuant to the Fund's right to liquidate your account if you
have less than $100 invested in the Fund.
- - Redemptions made in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
- - Redemptions from certain IRA and retirement plans that purchased shares prior
to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to it.
CONVERSION OF CLASS A SHARES. Your Class B shares and an appropriate portion of
reinvested dividends on those shares will be converted into Class A shares
automatically. This will occur no later than the month following eight years
after the shares were purchased, and will result in lower annual distribution
fees. If you exchanged Class B shares into the Fund from another John Hancock
fund, the calculation will be based on the time you purchased the shares in the
original fund. The Fund has been advised that the conversion of Class B Shares
to Class A Shares should not be taxable for Federal income tax purposes and
should not change a shareholder's tax basis or tax holding period for the
converted shares.
22
<PAGE> 82
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. The Fund
may hold payment until it is reasonably satisfied that investments recently made
by check or Invest-by-Phone have been collected (which may take up to 10
calendar days).
- -------------------------------------------------------------------------------
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION
REQUEST, PLEASE FOLLOW THESE PROCEDURES.
- -------------------------------------------------------------------------------
Once your shares are redeemed, the Fund generally sends you payment on the next
business day. When you redeem your shares, you may realize a taxable gain or
loss depending usually on the difference between what you paid for them and what
you receive for them, subject to certain tax rules. Under unusual circumstances,
the Fund may suspend redemptions or postpone payment for up to seven days or
longer, as permitted by Federal securities laws.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELEPHONE All Fund shareholders are automatically eligible for the
telephone redemption privilege. Call 1-800-225-5291, from
8:00 A.M. to 4:00 P.M. (New York Time), Monday through
Friday, excluding days on which the Exchange is closed.
Investor Services employs the following procedures to
confirm that instructions received by telephone are
genuine. Your name, the account number, taxpayer
identification number applicable to the account and other
relevant information may be requested. In addition,
telephone instructions are recorded.
You may redeem up to $100,000 by telephone, but the address
on the account must not have changed for the last thirty
days. A check will be mailed to the exact name(s) and
address shown on the account.
If reasonable procedures, such as those described above,
are not followed, the Fund may be liable for any loss due
to unauthorized or fraudulent telephone instructions. In
all other cases, neither the Fund nor Investor Services
will be liable for any loss or expense for acting upon
telephone instructions made in accordance with the
telephone transaction procedures mentioned above.
Telephone redemption is not available for IRAs, other
tax-qualified retirement plans or Fund shares that are in
certificated form.
During periods of extreme economic conditions or market
changes, telephone requests may be difficult to implement
due to a large volume of calls. During these times you
should consider placing redemption requests in writing or
using EASI-Line. EASI-Line's telephone number is
1-800-338-8080.
- ---------------------------------------------------------------------------------
BY WIRE If you have a telephone redemption form on file with the
Fund, redemption proceeds of $1,000 or more can be wired on
the next business day to your designated bank account and a
fee (currently $4.00) will be deducted. You may also use
electronic fund transfer to your assigned bank account and
the funds are usually collectible after two business days.
Your bank may or may not charge for this service.
Redemptions of less than $1,000 will be sent by check or
electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
included with this Prospectus.
- ---------------------------------------------------------------------------------
IN WRITING Send a stock power or "letter of instruction" specifying
the name of the Fund, the dollar amount or the number of
shares to be redeemed, your name, class of shares, your
account number, and the additional requirements listed
below that apply to your particular account.
- ---------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 83
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Sole A letter of instruction signed (with titles,
Proprietorship, Custodial where applicable) by all persons authorized
(Uniform Gifts or Transfer to to sign for the account, exactly as it is
Minors Act), General Partners registered with the signature(s) guaran-
teed.
Corporation, Association A letter of instruction and a corporate
resolution, signed by person(s) authorized
to act on the account with the signatures
guaranteed.
Trusts A letter of instruction signed by the
Trustee(s), with the signature(s)
guaranteed. (If the Trustee's name is not
registered on your account, also provide a
copy of the trust document, certified within
the last 60 days.)
If you do not fall into any of these registration categories, please call
1-800-225-5291 for further instructions.
</TABLE>
- --------------------------------------------------------------------------------
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request. It may not be provided by a notary
public. If the net asset value of the shares redeemed is $100,000 or less,
John Hancock Funds may guarantee the signature. The following institutions may
provide you with a signature guarantee, provided that any such institution
meets credit standards established by Investor Services: (i) a bank; (ii) a
securities broker or dealer, including a government or municipal securities
broker or dealer, that is a member of a clearing corporation or meets certain
net capital requirements; (iii) a credit union having authority to issue
signature guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v)
a national securities exchange, a registered securities exchange or a clearing
agency.
------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR
SIGNATURE.
------------------------------------------------------------------------------
THROUGH YOUR BROKER. Your broker may be able to initiate the redemption.
Contact your broker for instructions.
------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT
REDEMPTIONS.
------------------------------------------------------------------------------
If you have certificates for your shares, you must submit them with your stock
power or a letter of instruction. Unless you specify to the contrary, any
outstanding Class A shares will be redeemed before Class B shares. You may not
redeem certificated shares by telephone.
Due to the proportionately high cost of maintaining small accounts, the Fund
reserves the right to redeem at net asset value all shares in an account which
holds less than $100 and to mail the proceeds to the shareholder, or the
transfer agent may impose an annual fee of $10.00. No account will be
involuntarily redeemed or additional fee imposed if the value of the account
falls below the required minimum as a result of market action. No CDSC will be
imposed on involuntary redemption of shares.
Shareholders will be notified before these redemptions are to be made or this
fee is imposed, and will have 30 days to purchase additional shares to bring
their account balance up to the required minimum. Unless the number of shares
acquired by further purchases and dividend reinvestments, if any, exceeds the
number of shares redeemed, repeated redemptions from a smaller account may
eventually trigger this policy.
- -------------------------------------------------------------------------------
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
If your investment objective changes, or you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of each class
of the Fund only for shares of the same class of another John Hancock fund. For
this purpose, John Hancock funds with only one class of shares will be treated
as Class A, whether or not they have been so designated.
- -------------------------------------------------------------------------------
YOU MAY EXCHANGE SHARES OF THE FUND ONLY
FOR SHARES OF THE SAME CLASS OF ANOTHER
JOHN HANCOCK FUND.
- -------------------------------------------------------------------------------
24
<PAGE> 84
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Class B shares of the Fund which are subject to a CDSC may be exchanged
into Class B shares of another John Hancock fund without incurring the CDSC;
however, these shares will be subject to the CDSC schedule of the shares
acquired (except that exchanges into John Hancock Short-Term Strategic Income
Fund, John Hancock Limited-Term Government Fund and John Hancock Adjustable U.S.
Government Trust which will be subject to the initial fund's CDSC). For purposes
of computing the CDSC payable upon redemption of shares acquired in an exchange,
the holding period of the original shares is added to the holding period of the
shares acquired in an exchange. However, if you exchange Class B shares
purchased prior to January 1, 1994 for Class B shares of any other John Hancock
Fund, you will be subject to the CDSC schedule in effect on your initial
purchase date.
You may exchange Class B shares of the Fund into shares of a John Hancock money
market fund at net asset value; however, you will continue to be subject to the
same CDSC upon redemption.
The Fund reserves the right to require you to keep previously exchanged shares
(and reinvested dividends) in the Fund for 90 days before you are permitted to
execute a new exchange. The Fund may also terminate or alter the terms of the
exchange privilege, upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares in another for Federal income tax purposes. An exchange may
result in a taxable gain or loss.
When you make an exchange, your account registration in both the existing and
new account must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
Accounts under common control or ownership will be aggregated for this purpose.
Although
25
<PAGE> 85
the Fund will attempt to give you prior notice whenever it is reasonably able to
do so, it may impose these restrictions at any time.
BY TELEPHONE
1. When you complete the application for your initial purchase of Fund shares,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to authorize telephone exchanges.
2. Call 1-800-225-5291. Have the account number of your current Fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Your name, the account number, taxpayer identification number applicable to
the account and other relevant information may be requested. In addition,
telephone instructions are recorded.
IN WRITING
1. In a letter, request an exchange and list the following:
--the name and class of the Fund whose shares you currently own
--your account number
--the name(s) in which the account is registered
--the name of the fund in which you wish your exchange to be invested
--the number of shares, all shares or dollar amount you wish to exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
REINVESTMENT PRIVILEGE
1. You will not be subject to a sales charge on Class A shares reinvested in
shares of any John Hancock fund that is otherwise subject to a sales charge
as long as you reinvest within 120 days from the redemption date. If you paid
a CDSC upon a redemption, you may reinvest at net asset value in the same
class of shares from which you redeemed within 120 days. Your account will be
credited with the amount of the CDSC previously charged, and the reinvested
shares will continue to be subject to a CDSC. For purposes of computing the
CDSC payable upon a subsequent redemption, the holding period of the shares
acquired through reinvestment will include the holding period of the redeemed
shares.
- -------------------------------------------------------------------------------
IF YOU REDEEM SHARES OF THE
FUND, YOU MAY BE ABLE TO
REINVEST ALL OR PART OF THE
PROCEEDS IN SHARES OF THIS
FUND OR ANOTHER JOHN
HANCOCK FUND WITHOUT
PAYING AN ADDITIONAL
SALES CHARGE.
- -------------------------------------------------------------------------------
2. Any portion of your redemption may be reinvested in Fund shares or in shares
of any of the other John Hancock funds, subject to the minimum investment
limit of that fund.
26
<PAGE> 86
3. To reinvest, you must notify Investor Services in writing. Include the Fund's
name, the account number and class from which your shares were originally
redeemed.
SYSTEMATIC WITHDRAWAL PLAN
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain this application by calling your registered representative or by
calling 1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
3. Payments from your account can be made monthly, quarterly, semi-annually or
annually or on a selected monthly basis to yourself or any other designated
payee.
- -------------------------------------------------------------------------------
YOU CAN PAY ROUTINE BILLS FROM YOUR
ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS OF
FUNDS FROM YOUR RETIREMENT ACCOUNT TO
COMPLY WITH IRS REGULATIONS.
- -------------------------------------------------------------------------------
4. There is no limit on the number of payees you may authorize, but all payments
must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional Class A or Class B shares, because you may be
subject to initial sales charges on your purchases of Class A shares or to a
CDSC on your redemptions of Class B shares. In addition, your redemptions are
taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks or if deposits to a bank account are returned for any reason.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
1. You can authorize an investment to be automatically withdrawn each month from
your bank, for investment in Fund shares under the "Automatic Investing" and
"Bank Information" sections of the Account Privileges Application.
- -------------------------------------------------------------------------------
YOU CAN MAKE AUTOMATIC INVESTMENTS AND
SIMPLIFY YOUR INVESTING.
- -------------------------------------------------------------------------------
2. You can also authorize automatic investment through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
3. You can terminate your Monthly Automatic Accumulation Program plan at any
time.
4. There is no charge to you for this program, and there is no cost to the Fund.
5. If you have payments being withdrawn from a bank account and we are notified
that the account has been closed, your withdrawals will be discontinued.
GROUP INVESTMENT PROGRAM
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate dollar
amount of all participants' investments. To determine how to qualify for this
program, contact your registered representative or call 1-800-225-5291.
- -------------------------------------------------------------------------------
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS
MAY ESTABLISH ACCOUNTS.
- -------------------------------------------------------------------------------
2. The initial aggregate investment of all participants in the group must be at
least $250.
27
<PAGE> 87
3. There is no additional charge for this program. There is no obligation to
make investments beyond the minimum, and you may terminate the program at any
time.
INVESTMENTS, TECHNIQUES AND RISK FACTORS
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in illiquid investments, which include repurchase agreements maturing in
more than seven days, restricted securities and securities not readily
marketable. The Fund may also invest up to 10% of its assets in restricted
securities eligible for resale to certain institutional investors pursuant to
Rule 144A under the Securities Act of 1933. To the extent that the Fund's
holdings of participation interests, COPs and inverse floaters are determined to
be illiquid, such holdings will be subject to the 10% restriction on illiquid
investments.
LENDING OF SECURITIES AND REPURCHASE AGREEMENTS. For the purpose of realizing
additional (taxable) income, the Fund may lend to broker-dealers portfolio
securities amounting to not more than 33 1/3% of its total assets taken at
current value or may enter into repurchase agreements. In a repurchase
agreement, the Fund buys a security subject to the right and obligation to sell
it back to the issuer at the same price plus accrued interest. These
transactions must be fully collateralized at all times. The Fund may reinvest
any cash collateral in short-term highly liquid debt securities. However, they
may involve some credit risk to the Fund if the other party should default on
its obligation and the Fund is delayed in or prevented from recovering the
collateral. Securities loaned by the Fund will remain subject to fluctuations of
market value.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund may purchase securities
on a forward or "when-issued" basis and may purchase or sell securities on a
forward commitment basis to hedge against anticipated changes in interest rates
and prices. When the Fund engages in these transactions, it relies on the seller
or the buyer, as the case may be, to consummate the transaction. Failure to
consummate the transaction may result in the Fund's losing the opportunity to
obtain an advantageous price and yield. If the Fund chooses to dispose of the
right to acquire a when-issued security prior to its acquisition or dispose of
its right to deliver or receive against a forward commitment, it can incur a
taxable gain or a loss.
SHORT TERM TRADING AND PORTFOLIO TURNOVER. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. Short-term trading may have the effect of
increasing portfolio turnover and may increase net short-term capital gains,
distributions from which would be taxable to shareholders as ordinary income.
The Fund's portfolio securities may be changed without regard to the holding
period of these securities (subject to certain tax restrictions), when the
Adviser deems that this action will help achieve the Fund's objective given a
change in an issuer's operations or changes in general market conditions. The
Fund's portfolio turnover rate is set forth in the table under the caption
"Financial Highlights."
28
<PAGE> 88
OPTIONS AND FUTURES TRANSACTIONS. The Fund may buy and sell options contracts
on securities and debt security indices, interest rate and municipal bond index
futures contracts and options on such futures contracts. Options and futures
contracts are bought and sold to manage the Fund's exposure to changing interest
rates and security prices. Some options and futures strategies, including
selling futures, buying puts and writing calls, tend to hedge a Fund's
investment against price fluctuations. Other strategies, including buying
futures, writing puts, and buying calls, tend to increase market exposure.
Options and futures may be combined with each other or with forward contracts in
order to adjust the risk and return characteristics of the overall strategy. The
Fund may invest in options and futures based on debt securities and municipal
bond indices (securities indices).
Options and futures can be volatile investments and involve certain risks. If
the Adviser applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower the Fund's return. The
Fund could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. Options and
futures do not pay interest, but may produce capital gains or losses,
distributions of which will be taxable to shareholders.
The Fund will not engage in a transaction in futures or options on futures if,
immediately thereafter, the sum of initial margin deposits and premiums required
to establish positions in futures contracts and options on futures would exceed
5% of the Fund's net assets. The loss incurred by the Fund investing in futures
contracts and in writing options on futures is potentially unlimited and may
exceed the amount of any premium received. The Fund's transactions in options
and futures contracts may be limited by the requirements of the Code for
qualification as a regulated investment company. See the Statement of Additional
Information for further discussion of options and futures transactions,
including tax effects and investment risks.
MUNICIPAL LEASE OBLIGATIONS. The Fund may purchase participation interests
which give the Fund an undivided pro rata interest in the tax exempt security.
For certain participation interests, the Fund will have the right to demand
payment, on a specified number of days' notice for all or any part of the Fund's
participation interest in the tax exempt security plus accrued interest.
Participation interests that are determined to be not readily marketable, will
be considered illiquid for purposes of the Fund's 10% restriction on investment
in securities.
The Fund may also invest in Certificates of Participation ("COP's") which
provide participation interests in lease revenues. Each COP represents a
proportionate interest in or right to the lease-purchase payment made under
municipal lease obligations or installment sales contracts. Municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (e.g., schools, dormitories, office
buildings or prisons) or the acquisition of equipment. In certain states, such
as California, COP's constitute a majority of new municipal financing issues.
Certain municipal lease obligations may trade infrequently. Accordingly, COPs
will be purchased and monitored pursuant to
29
<PAGE> 89
analysis by the Adviser and reviewed according to procedures by the Board of
Trustees which consider various factors in determining the liquidity risk. COPs
will not be considered illiquid for purposes of the Fund's 10% limitation on
illiquid securities provided the Adviser determines that there is a readily
available market for such securities. An investment in COPs is subject to the
risk that a municipality may not appropriate sufficient funds to meet payments
on the underlying lease obligation. See the Statement of Additional Information
for additional discussion of participation interests and municipal lease
obligations.
DERIVATIVE INSTRUMENTS. The Fund may purchase or enter into derivative
instruments to enhance return, to hedge against fluctuations in interest rates
or securities prices, to change the duration of the Fund's fixed income
portfolio or as a substitute for the purchase or sale of securities. The Fund's
investments in derivative securities may include certain floating rate and
indexed securities. The Fund's transactions in derivative contracts may include
the purchase or sale of futures contracts on securities or indices; options on
futures contracts; and options on securities or indices and forward contracts to
purchase or sell securities.
All of the Funds' transactions in derivative instruments involve a risk of loss
or depreciation due to unanticipated adverse changes in interest rates or
securities prices. The loss on derivative contracts may exceed the Fund's
initial investment in these contracts. In addition, the Fund may lose the entire
premium paid for purchased options that expire before they can be profitably
exercised by the Fund.
Indexed Securities. The Fund may invest in indexed securities, including
floating rate securities that are subject to a maximum interest rate ("capped
floaters") and leveraged inverse floating rate securities ("inverse floaters")
(up to 10% of the Fund's total assets). The interest rate or, in some cases, the
principal payable at the maturity of an indexed security may change positively
or inversely in relation to one or more interest rates, financial indices or
other financial indicators ("reference prices"). An indexed security may be
leveraged to the extent that the magnitude of any change in the interest rate or
principal payable on an indexed security is a multiple of the change in the
reference price. Thus, indexed securities may decline in value due to adverse
market changes in interest rates or other reference prices.
Risks Associated With Derivative Securities and Contracts. The risks associated
with the Fund's transactions in derivative securities and contracts may include
some or all of the following:
Market Risk. Investments in floating rate and indexed securities are subject to
the interest rate and other market risks described above. Entering into a
derivative contract involves a risk that the applicable market will move against
the Fund's position and that the Fund will incur a loss. For derivative
contracts other than purchased options, this loss may exceed the amount of the
initial investment made or the premium received by the Fund.
Leverage and Volatility Risk. Derivative instruments may sometimes increase or
leverage the Fund's exposure to a particular market risk. Leverage enhances the
price volatility of derivative instruments held by the Fund. The Fund may
partially
30
<PAGE> 90
offset the leverage inherent in derivative contracts by maintaining a segregated
account consisting of cash and liquid, high grade debt securities, by holding
offsetting portfolio securities or contracts or by covering written options.
Correlation Risk. A Fund's success in using derivative instruments to hedge
portfolio assets depends on the degree of price correlation between the
derivative instrument and the hedged asset. Imperfect correlation may be caused
by several factors, including temporary price disparities among the trading
markets for the derivative instrument, the assets underlying the derivative
instrument and the Fund's portfolio assets.
Credit Risk. Derivative securities and over-the-counter derivative contracts
involve a risk that the issuer or counterparty will fail to perform its
contractual obligations.
Liquidity and Valuation Risk. Some derivative securities are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, a commodity or exchange may suspend
or limit trading in an exchange-traded derivative contract, which may make the
contract temporarily illiquid and difficult to price. The staff of the SEC takes
the position that certain over-the-counter options are subject to the Fund's 10%
limit on illiquid investments. The Fund's ability to terminate over-the-counter
derivative contracts may depend on the cooperation of the counterparties to such
contracts. For thinly traded derivative securities and contracts, the only
source of price quotations may be the selling dealer or counterparty.
31
<PAGE> 91
APPENDIX A
EQUIVALENT YIELDS:
TAX EXEMPT VERSUS TAXABLE INCOME FOR 1994
The table below shows the effect of the tax status of California Tax Exempt
Securities on the yield received by their holders under the regular federal
income tax and California personal income tax laws. It gives the approximate
yield a taxable security must earn at various income brackets to produce
after-tax yields equivalent to those of California Tax Exempt Securities
yielding from 4.0% to 7.0%.
<TABLE>
<CAPTION>
MARGINAL
COMBINED
CALIFORNIA IN CALIFORNIA, A TAX-EXEMPT YIELD OF:
SINGLE RETURN JOINT RETURN AND FEDERAL ----------------------------------------------------------------------
- ---------------- ---------------- INCOME TAX 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
(TAXABLE INCOME) BRACKET* ----------------------------------------------------------------------
- ------------------------------------- ----------- IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-4,552 $ 0-9,104 15.85% 4.75% 5.35% 5.94% 6.54% 7.13% 7.72% 8.32%
$ 4,553-10,789 $ 9,105-21,578 16.70% 4.80% 5.40% 6.00% 6.60% 7.20% 7.80% 8.40%
$ 10,790-17,027 $ 21,579-34,054 18.40% 4.90% 5.51% 6.13% 6.74% 7.35% 7.97% 8.58%
$ 17,028-22,100 $ 34,055-36,900 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$ 22,101-23,637 $ 36,901-47,274 32.32% 5.91% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
$ 23,638-29,873 $ 47,275-59,746 33.76% 6.04% 6.79% 7.55% 8.30% 9.06% 9.81% 10.57%
$ 29,874-53,500 $ 59,747-89,150 34.70% 6.13% 6.89% 7.66% 8.42% 9.19% 9.95% 10.72%
$ 53,501-103,600 $ 89,151-140,000 37.42% 6.39% 7.19% 7.99% 8.79% 9.59% 10.39% 11.19%
$103,601-115,000 $140,001-207,200 41.95% 6.89% 7.75% 8.61% 9.47% 10.34% 11.20% 12.06%
$115,001-207,200 $207,201-250,000 42.40% 6.94% 7.81% 8.68% 9.55% 10.42% 11.28% 12.15%
$207,201-250,000 $250,001-414,400 45.64% 7.36% 8.28% 9.20% 10.12% 11.04% 11.96% 12.88%
$ 250,001 and up $ 414,401 and up 46.24% 7.44% 8.37% 9.30% 10.23% 11.16% 12.09% 13.02%
</TABLE>
- ---------------
* The marginal combined bracket includes the effect of deducting state taxes
on your federal tax return.
The Chart is for illustrative purposes only and is not intended to project
performance of the Fund.
While the Fund principally invests in obligations exempt from federal and
California state income taxes, a portion of the Fund's distributions may be
subject to these taxes or to the alternative minimum tax.
California state income tax rates and brackets have not yet been set for 1995.
This may result in higher or lower actual rates. The above chart is intended for
estimation only.
A-1
<PAGE> 92
(NOTES)
<PAGE> 93
(NOTES)
<PAGE> 94
(NOTES)
<PAGE> 95
JOHN HANCOCK CALIFORNIA TAX-FREE
INCOME FUND JOHN HANCOCK
CALIFORNIA
INVESTMENT ADVISOR TAX-FREE INCOME
John Hancock Advisers, Inc. FUND
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc. CLASS A AND CLASS B SHARES
101 Huntington Avenue PROSPECTUS
Boston, Massachusetts 02199-7603 MAY 1, 1995
CUSTODIAN A MUTUAL FUND SEEKING TO OBTAIN AS
Investors Bank & Trust Company HIGH A LEVEL OF CURRENT INCOME EX-
24 Federal Street EMPT FROM BOTH FEDERAL INCOME
Boston, Massachusetts 02110 TAXES AND CALIFORNIA PERSONAL IN-
COME TAXES AS IS CONSISTENT WITH
TRANSFER AGENT PRESERVATION OF CAPITAL.
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For Service Information
For Telephone Exchange
For Investment-by-Phone call 1-800-225-5291
For Telephone Redemption
For TDD call 1-800-554-6713
101 HUNTINGTON AVENUE
T280P 5/95 TELEPHONE 1-800-225-5291
(LOGO) Printed
on Recycled Paper
<PAGE> 96
EXHIBIT C
JOHN HANCOCK
CALIFORNIA TAX-FREE
INCOME FUND
ANNUAL REPORT
December 31, 1994
[LOGO]
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
[Back Cover]
In upper left corner, return address: John Hancock California Tax-Free Income
Fund, John Hancock Funds Shareholder Services, P.O. Box 9656, Providence, RI
02940-9656. In upper right corner, postage information: Bulk Rate U.S. Postage
Paid Permit No. 6011, Houston, Texas. In lower left corner, 3/8" x 3/8" John
Hancock Funds logo. A box sectioned in quadrants with a triangle in upper
left, a circle in upper right, a cube in lower left and a diamond in lower
right.
<PAGE> 97
Chairman's Message
A 2" x 2 7/16" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, centered at top of page with copy wrapped around photo.
Dear Shareholders,
On behalf of our nearly 700 associates, I'm delighted to welcome you to John
Hancock Funds. As you all know, Transamerica Fund Management Company was
acquired by John Hancock Funds on December 22, 1994, following a favorable
shareholder vote. At that time, all of the Transamerica mutual funds became
part of the John Hancock family of funds.
We're excited about the opportunities this acquisition will bring to
shareholders. The combined firms form a larger, more competitive organization
with more than $13 billion in assets under management and more than 1 million
shareholders. Now with 50 open-end funds, 8 closed-end funds and a full array
of retirement and private account services, John Hancock Funds offers you a
broader selection of investment choices to meet your long-term financial needs.
What's more, the union of the John Hancock and Transamerica investment teams
gives you access to some of the top talent in the industry.
The Transamerica name is changing, but the commitment to serving you as a
valued shareholder isn't. Here at John Hancock Funds, our motto is: "We invest
in quality first." It has to do with the way we invest your money and the way
we work with you. Not only do we strive to ensure that your investments are
well managed, we also take pride in providing the highest quality customer
service. We can't guarantee investment performance; nobody can. The quality of
our service, however, depends totally on us. That is something that we can
guarantee.
In mid-May, we anticipate that all of the Transamerica funds will be fully
integrated into John Hancock's internal shareholder service organization, John
Hancock Investor Services. At that time, not only will you gain exchange
privileges into all John Hancock funds, but your account will be handled by one
of the top-rated service organizations in the industry. To show you how
seriously we take our commitment to quality, you will have access to our
service guarantee. If we make an error in processing a transaction in your
account, we will deposit $25 into it. Or, if you have a retirement account, we
will waive the annual fee.
We value your business and look forward to serving your investment needs in
the years to come.
Sincerely,
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
John Hancock Funds
1
<PAGE> 98
By The Portfolio Management Team
John Hancock California
Tax-Free Income Fund
Rising Interest Rates And California Credit Problems
Hit Municipal Bonds But Long-Term Outlook Still Positive
Under most circumstances, the combination of a 44% drop in the supply of
municipal bonds and higher tax rates would lead to higher prices for tax-free
bonds. During 1994, however, when the Federal Reserve Board raised short-term
interest rates in an attempt to head off inflation and slow economic growth,
the bond market responded by dramatically raising long-term rates. The yield on
the 30-year Treasury bond climbed from 6.26% at the beginning of 1994 to 7.84%
at the year's end. The increase in Treasury yields led to the worst year for
municipal bonds since 1987. The Bond Buyer 20, a municipal bond index, rose in
yield from 5.28% to 6.74%. Since yields and bond prices move inversely, the
price on municipal bonds dropped accordingly.
A tax provision in the 1993 budget added an extra measure of illiquidity to
the municipal market. Most municipal bonds are originally issued at a discount
to par (face value of the bond). The rise in yields and corresponding drop in
prices caused a further decline in price for these bonds. Under this tax
provision, purchasing bonds at a price significantly lower than the original
issue discount price can create taxable income for buyers when the bonds
appreciate back to the original discount price. As a result, demand dropped
during the reporting period.
In California, continuing budget problems, combined with a national
credit-rating agency's negative outlook for the state's economy and a credit
rating downgrade, added to the downward pressure on municipal bond prices. Late
in the period, the state received another blow when Orange County filed for
bankruptcy because the value of its highly-leveraged investment pool plunged.
This hurt not only Orange County's direct debt obligations, but debt
obligations of the 180 local governments and agencies that were invested in the
pool.
RISING RATES HURT
FUND PERFORMANCE
Few state municipal bond funds escaped the market's downturn, and John Hancock
California Tax-Free Income Fund was no exception. For the 12 months ended
December 31, 1994, Class A and Class B Shares had total returns of -9.31% and
- -9.99%, respectively, at net asset value. The average California municipal bond
fund was down -7.52% according to Lipper Analytical Services.*
Our strategy of maintaining a long maturity caused the Fund to underperform
its peers. A longer maturity allows the Fund to pay a higher yield.
Shareholders who receive dividend checks earn a higher level of income than
they would from funds with shorter maturities; shareholders who reinvest
dividends may experience a higher total return over time. Although there will be
2
<PAGE> 99
John Hancock California Tax-Free Income Fund
times, like the recent reporting period, when we will underperform, we believe
that maintaining a long maturity will help us to outperform over the long-term.
As of December 31, 1994, our average maturity was 24 years.
The Fund continued to offer a competitive yield during the period. According
to Lipper, the 12-month yield for Class A Shares was 6.29% and 5.48% for Class
B Shares, versus a California municipal bond fund category average of 5.87%.*
Yield, as calculated by Securities and Exchange Commission standards was 6.16%
for Class A Shares and 5.70% for Class B Shares for the 30 days ended December
31, 1994.**
During the 12-month period, the Fund paid $0.583 per share distributions for
Class A Shares and $0.508 for Class B Shares. Please remember that a portion of
the Fund's distributions may be subject to federal income taxes, state income
taxes or the alternative minimum tax. In January 1994, the Fund distributed
less than $0.01 per share of taxable gains that were carried over from tax year
1993.
STEADY STRATEGY
We manage the Fund for high tax-free yields and preservation of capital over
the long-term. We maintained that objective, making minor changes in response to
the interest-rate environment.
We reduced the percentage of alternative minimum tax bonds and nonrated
securities during the period. We believe that these bonds will probably not
perform as well as other issues when the municipal bond market rebounds. We
upgraded the credit quality of the Fund for the same reason.
We also increased our call protection. By buying bonds that cannot be called
(redeemed early), we locked in higher yields. As of December 31, 1994, the
portfolio's average call date was May 31, 2004.
We continued our strategy of seeking out the most attractively valued bonds
by moving between credit qualities. We invested in lower-quality issues when we
felt we were being appropriately compensated for the added risk. By the same
token, we sold high-quality bonds that we believed were overvalued.
We increased our exposure to essential service revenue bonds which are
backed by user fees rather than tax revenues.
ORANGE COUNTY EXPOSURE
A small portion of the portfolio was invested in bonds affected by the Orange
County bankruptcy. These holdings are not direct obligations of Orange County
but were issued by entities that invested in the Orange County pool. These
bonds are backed by dedicated, separate revenue streams. We anticipate no loss
of revenue as a result of the Orange County, California bankruptcy. The value
of these holdings decreased slightly on the news of the bankruptcy but
increased in January, tracking the bond market. We anticipate that these
holdings will regain normal trading value as the situation is resolved.
Our portfolio remained well diversified and contained 117 issues in 14 market
sectors as of December 31, 1994.
OUTLOOK
In California, the state's economy shows signs of improvement, including job
growth and stronger home sales. Ultimately this should relieve budget pressures
and improve credit fundamentals which bodes well for municipal bonds. However,
we expect some short-term pressures to remain as the Orange County situation is
resolved.
Looking forward, we remain cautiously optimistic about returns in municipal
bonds. Total issuance in 1995 should be very close to 1994's total of $160
billion. With approximately $300 billion out of the $1.2 trillion municipal
bond market either maturing or being called, there should be periods when
demand will exceed supply. Demand from individuals should remain strong due to
higher after-tax yields. Currently, yields on 30-year, AAA-rated municipals are
approximately 81% of the 30-year Treasury bond, which more than compensates for
the possibility of lower tax rates being discussed by the new Congress.
While demand from trust and insurance buyers should
3
<PAGE> 100
John Hancock California Tax-Free Income Fund
remain moderate due to higher short-term yields, demand from mutual funds could
increase from 1994 levels. If interest rates stabilize or the perception among
investors changes to a stable long-term interest-rate environment, net sales of
mutual funds will once again drive municipal prices higher.
We believe that the economy will slow to its historic norm of between 2.5% to
3.0% annual gross domestic product growth by the middle of 1995. Until that
happens, the Federal Reserve may continue to raise short-term interest rates.
Consumers seem to have satisfied their pent-up demand which, together with
higher short-term rates, should cool the economy. We expect long-term rates to
move lower in 1995 in response to a slower economy. When this happens,
municipal bond fund investors should see the returns on their investments begin
to improve.
* Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance may be
lower. Also, the Fund reimburses expenses. Without expense reimbursement, yield
and total return would have been lower. Total return would have been -13.73%
and -15.12% for Class A and Class B Shares, respectively, at net asset value
for the 12 months ended December 31, 1994.
** The SEC yield reflects net investment income earned by the Fund. Without
expense reimbursement, yields would have been 6.01% and 5.55% for Class A and
Class B Shares, respectively.
A box with heading "Top Five Sectors" following the footnote in the first
(left) column. Box lists the following: 1. Public Facilities, 21%,
2. Redevelopment, 17%, 3. Health, 13%, 4. Community Facilities, 13% 5. Water,
12%. The footnote below states: "As a percentage of total net assets on
December 31, 1994."
Table entitled "Scorecard" following the "Top Five Sectors". The header for
the left column is "Investments;" The header for the right column is "Recent
Performance...And What's Behind The Numbers." The first listing is CA
Department of Water followed by a down arrow and the phrase "Essential service
down on drought concerns." The second listing is California Statewide followed
by a down arrow and the phrase "Credit downgrade."
Bar chart with heading "Fund Performance" at the top of the second (right)
column. Under the heading is the note: "For the year ended December 31, 1994."
The horizontal chart is scaled in increments of -2% from -12% at the left and
12% at the right. Within the chart, there are three solid bars. The first
represents the -9.31% total return for John Hancock California Tax-Free Income
Fund Class A. The second represents the -9.99% total return for John Hancock
California Tax-Free Income Fund Class B. The third represents the -7.52% total
return for the Lipper Average California Municipal Bond Fund. The footnote
below states: "Total returns for John Hancock California Tax-Free Income Fund
are at net asset value with all distributions reinvested. The average
California municipal bond fund is tracked by Lipper Analytical Services.* See
the following page for historical performance information."
4
<PAGE> 101
John Hancock California Tax-Free Income Fund
LONG-TERM PERFORMANCE REVIEW
If you had invested $10,000 in John Hancock California Tax-Free Income Fund on
December 29, 1989 (Class A inception) and reinvested all dividends, your
investment, upon redemption, would have grown to $12,761 as of December 31,
1994.* Class B Shares, which were introduced on December 31, 1991, would have
grown to $10,698.
The chart compares the Fund's performance to the Lehman Brothers Municipal
Bond Index and the Consumer Price Index (CPI). The Lehman Brothers index is an
unmanaged index of municipal securities that are similar, but not identical, to
the bonds in the Fund's portfolio. The CPI is a commonly used gauge of the rate
of inflation.
Returns for Class A Shares (including the Fund's average annual total
returns for the one-year and since inception periods ended December 31, 1994,
as shown in the inset box) reflect the maximum 4.75% sales charge. Returns for
Class B Shares (for one-year and since inception, as shown in the box) reflect
expenses and the applicable contingent deferred sales charge which declines
yearly as follows: 5%, 4%, 3%, 3%, 2%, 1%, 0%. Return for the Lehman index does
not reflect a sales charge. If you were to purchase individual bonds
represented in this index, any sales charges that you would pay would reduce
your return accordingly.
Your investment return will fluctuate so that your shares, when redeemed, may
be worth more or less than the original cost. Performance information
representing past performance is no guarantee of future results.
* Class A Shares' return since inception includes the effect of expense
reimbursement which, if excluded, would have caused performance to be lower.
Without expense reimbursement, Class A return would have been -13.73% for the
one-year period and 4.62% since inception. Class B return would have been
- -15.12% for the one-year period and 2.07% since inception.
Boxed line chart at top right corner of page with heading "John Hancock
California Tax-Free Income Fund A vs. Lehman Brothers Muni Bond Index." Note
below states" "Growth of $10,000 Investment Since Inception, 12/29/89 -
12/31/94." The chart is scaled in $1,000 increments from $9,000 to $17,000 at
the left. The chart is scaled at the bottom from 12/29/89 at the left to 1994
at the right. Within the chart are three lines. The solid line represents the
value of a hypothetical $10,000 investment in the John Hancock California Tax-
Free Income Fund Class A on December 29, 1989 including 4.75% front load sales
charge that is equal to $12,761 on December 31, 1994. The dashed line
represents the value of a hypothetical $10,000 investment in the Lehman
Brothers Muni Bond Index on December 29, 1989 and is equal to $13,895 on
December 31, 1994. The dotted line represents a hypothetical $10,000
investment in the Consumer Price Index on December 29, 1989 and is equal to
$11,871 on December 31, 1994. In the upper left corner of the chart, is a box
with the heading "Average Annual Total Return." Text for the box reads from
left: "1 year, 5 year, Inception" on the first line and from left on the
second line, "-13.61%, 4.99% and 4.99%."
Page 5
Boxed line chart at top right corner of page with heading "Class B Shares."
Note below states" "Growth of $10,000 Investment Since Inception, 12/31/91 -
12/31/94." The chart is scaled in $1,000 increments from $10,000 to $14,000 at
the left. The chart is scaled at the bottom from 12/31/91 at the left to 1994
at the right. Within the chart are three lines. The solid line represents the
value of a hypothetical $10,000 investment in the John Hancock California Tax-
Free Income Fund Class B on December 31, 1991 including the applicable 5.00%
contingent deferred sales charge and expenses and is equal to $10,698 on
December 31, 1994. The dashed line represents the value of a hypothetical
$10,000 investment in the Lehman Brothers Muni Bond Index on December 31, 1991
and is equal to $11,584 on December 31, 1994. The dotted line represents a
hypothetical $10,000 investment in the Consumer Price Index on December 31,
1991 and is equal to $10,855 on December 31, 1994. In the upper left corner of
the chart, is a box with the heading "Average Annual Total Return." Text for
the box reads from left: "1 year, 5 year, Inception" on the first line and
from left on the second line, "-14.99%, N/A and 2.27%."
5
<PAGE> 102
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ---------- -----------
<S> <C> <C>
LONG-TERM MUNICIPAL
OBLIGATIONS-97.01%
COMMUNITY
FACILITIES-12.62%
Capistrano Unified School
District Community
Facilities District Bonds
7.000% due 09/01/18...................... $ 1,500,000 $ 1,331,250
7.500% due 09/01/07...................... 3,500,000 3,246,250
8.375% due 10/01/20...................... 3,000,000 3,041,250
Fontana Special Tax
Community Facilities
District Bonds
8.375% due 04/01/11...................... 10,000,000 8,262,500
8.400% due 04/01/15...................... 1,000,000 823,750
Fresno Joint Powers
Financing Authority
Revenue Refunding Bonds
6.550% due 09/02/12...................... 2,000,000 1,812,500
Industry Urban Development
Agency Bonds
6.900% due 11/01/16...................... 1,020,000 975,375
7.375% with various
maturities to 05/01/15................ 1,145,000 1,187,937
Los Alamitos Unified
School District Special
Tax Community Facilities
District Bonds
7.150% due 08/15/21...................... 6,005,000 5,359,463
Los Angeles County
Improvement Bonds
8.375% due 09/02/18...................... 3,865,000 3,947,131
Pleasanton Joint Power
Financing Authority
Revenue Bonds
6.600% due 09/02/08...................... 2,940,000 2,730,525
Sacramento Unified School
District Special Tax
Community Facilities
District Bonds
7.300% due 09/01/13...................... 760,000 779,000
Saddleback Valley Unified
School District
Community Facilities
District Bonds
7.750% due 09/01/16...................... 3,200,000 3,124,000
Santa Clarita Community
Facilities District
Special Tax Bonds
7.450% due 11/15/10...................... 3,600,000 3,636,000
-----------
40,256,931
HEALTH-12.92%
California Health Facilities
Financing Authority
Revenue Bonds
5.600% due 05/01/33...................... 3,800,000 2,987,750
5.800% due 12/01/18...................... 3,140,000 2,633,675
6.250% due 07/01/12...................... 1,135,000 1,037,106
7.500% due 04/01/22...................... 2,000,000 2,020,000
California Statewide
Community Development
Authority Revenue
Certificates of
Participation
5.500% due 07/01/23...................... 6,000,000 4,915,000
5.600% due 11/15/17...................... 2,435,000 1,996,700
6.200% due 08/01/12...................... 1,250,000 1,129,687
6.250% due 08/01/22...................... 2,590,000 2,263,012
6.500% due 08/01/22...................... 15,750,000 13,978,125
6.700% due 05/01/11...................... 1,250,000 1,200,000
6.750% due 12/01/21...................... 7,500,000 7,040,625
------------
41,201,680
HOSPITALS-7.93%
Arcadia Hospital
Revenue Bonds
6.625% due 11/15/22...................... 1,205,000 1,051,363
Bakersfield Memorial
Hospital Revenue Bonds
6.500% due 01/01/22...................... 2,000,000 1,792,500
</TABLE>
6
<PAGE> 103
STATEMENT OF NET ASSETS
John HancocK California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
Covina Hospital Revenue
Certificates of
Participation
7.000% due 03/01/17...................... 925,000 857,937
Duarte City of Hope
Medical Center
Certificates of
Participation
6.250% due 04/01/23...................... 13,900,000 11,571,750
Rancho Mirage Joint Powers
Financing Authority
Certificates of
Participation
7.000% due 03/01/22...................... 4,500,000 4,201,875
San Bernardino County
Certificates of
Participation
5.500% due 08/01/17...................... 7,500,000 5,812,500
-----------
25,287,925
HOUSING--0.57%
California Housing Finance
Agency Revenue Bonds
7.375% due 08/01/17...................... 335,000 341,700
Upland Housing Authority
Revenue Bonds
7.500% due 07/01/03...................... 190,000 190,238
7.850% due 07/01/20...................... 1,280,000 1,294,400
-----------
1,826,338
INDUSTRIAL
DEVELOPMENT--0.30%
ABAG Finance Authority
for Nonprofit Corps.
Certificates of
Participation
6.800% due 10/01/11...................... 1,000,000 962,500
MORTGAGE INSURED
BONDS--1.38%
California Housing Finance
Agency Home Mortgage
Revenue Refunding Bonds
7.250% due 08/01/17...................... 3,500,000 3,561,250
Southern California Home
Finance Authority Single
Family Mortgage Revenue
Bonds Series A
6.750% due 09/01/22...................... 850,000 835,125
-----------
4,396,375
MUNICIPAL UTILITY
DISTRICTS--0.92%
Sacramento Municipal
Utility District Electric
Revenue Bonds
5.750% due 05/15/22...................... 2,700,000 2,274,750
Southern California Public
Power Authority
Transmission Project
Revenue Bonds
5.500% due 07/01/20...................... 800,000 655,000
-----------
2,929,750
PUBLIC FACILITIES--21.03%
Anaheim Certificates of
Participation
6.870% due 07/16/23(A)................... 2,000,000 1,690,000
Anaheim Public Finance
Authority Electric Utility
Revenue Bonds
5.750% due 10/01/22..................... 2,750,000 2,354,688
California Public Capital
Improvements Financing
Authority Revenue Bonds
8.125% due 03/01/95...................... 230,000 230,862
</TABLE>
7
<PAGE> 104
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
California State Public
Works Board Lease
Revenue Bonds
5.000% due 12/01/19 .................... 7,795,000 6,021,638
6.700% due 10/01/17 .................... 1,500,000 1,428,750
Chula Vista Certificates of
Participation
6.000% with various
maturities to 09/01/12 ................. 1,700,000 1,506,875
Concord Joint Powers
Financing Authority
Lease Revenue Bonds
5.250% due 08/01/19 .................... 3,520,000 2,772,000
Cupertino Certificates of
Participation
5.750% due 01/01/16 .................... 2,500,000 2,137,500
Delano Certificates of
Participation
7.000% due 04/01/10 .................... 2,000,000 1,915,000
Encinitas Certificates of
Participation
6.750% due 12/01/11 .................... 1,300,000 1,270,750
Inglewood Certificates of
Participation
7.000% due 08/01/19 .................... 1,000,000 966,250
Los Angeles County
Certificates of Participation
6.250% due 07/01/03 .................... 2,000,000 1,920,000
6.500% due 07/01/08 .................... 4,000,000 3,735,000
Los Angeles County Disney
Parking Certificates of
Participation
6.500% due 03/01/23 .................... 2,000,000 1,820,000
Los Angeles County Public
Works Finance Authority
Revenue Bonds
6.000% due 10/01/15 ................... 3,750,000 3,375,000
Oceanside Certificates of
Participation
6.000% due 04/01/17 .................... 2,875,000 2,461,719
6.375% due 04/01/12 .................... 3,000,000 2,767,500
Orange County Certificates
of Participation
6.700% due 08/01/18 .................... 1,000,000 963,750
San Diego County
Certificates of
Participation
6.750% due 08/01/19 .................... 3,000,000 2,996,250
San Jose Financing
Authority Revenue Bonds
6.400% due 09/01/17 .................... 2,000,000 1,857,500
San Marcus Public Facilities
Authority Revenue
Refunding Bonds
6.200% due 08/01/22 .................... 5,000,000 4,156,250
San Mateo Joint Powers
Financing Authority
Lease Revenue
Refunding Bonds
5.000% due 07/01/21 .................... 1,815,000 1,393,012
5.125% due 07/01/18 .................... 2,500,000 1,978,125
Santa Ana Financing
Authority Lease
Revenue Bonds
6.250% with various
maturities to 07/01/24 ................. 11,790,000 11,041,550
Stanislaus County
Certificates of
Participation
7.550% due 04/01/18 .................... 2,295,000 2,283,525
Vallejo Certificates of
Participation
8.000% due 02/01/06 .................... 2,000,000 2,025,000
-----------
67,068,494
REDEVELOPMENT-
COMMERCIAL--1.22%
Azusa Redevelopment
Agency Tax
Allocation Bonds
7.000% due 08/01/22 .................. 2,000,000 1,875,000
</TABLE>
8
<PAGE> 105
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ---------- -----------
<S> <C> <C>
BRENTWOOD REDEVELOPMENT
Agency Tax
Allocation Bonds
7.700% due 11/01/08..................... 135,000 135,844
Richmond Joint Powers
Financing Authority
Revenue Bonds
7.700% due 10/01/10..................... 1,835,000 1,880,875
-----------
3,891,719
REDEVELOPMENT-
MIXED USE--15.94%
Avalon Community
Improvement Agency Tax
Allocation Bonds
6.400% due 08/01/22..................... 1,975,000 1,752,813
Bakersfield Central District
Development Agency Tax
Allocation Bonds
6.625% due 04/01/15..................... 4,000,000 3,665,000
Burbank Redevelopment
Agency Tax
Allocation Bonds
6.000% due 12/01/23..................... 2,750,000 2,296,250
Clearlake Redevelopment
Agency Tax
Allocation Bonds
6.400% due 10/01/23..................... 500,000 446,250
Concord Redevelopment
Agency Tax Allocation
General Obligation Bonds
5.750% due 07/01/10..................... 1,145,000 970,387
Davis City Redevelopment
Agency Tax
Allocation Bonds
7.000% due 09/01/24..................... 5,115,000 5,204,513
Huntington Park Public
Financing Authority
Revenue Bonds
7.600% due 09/01/18..................... 5,000,000 4,675,000
Inglewood Redevelopment
Agency Tax
Allocation Bonds
6.125% due 07/01/13..................... 1,000,000 873,750
Lincoln Redevelopment
Agency Tax Allocation
Revenue Bonds
7.650% due 08/01/17..................... 3,350,000 3,379,313
Merced Public Financing
Authority Revenue Bonds
5.500% due 12/01/15..................... 3,630,000 2,958,450
Orange County
Development Agency Tax
Allocation Bonds
6.125% due 09/01/23..................... 3,000,000 2,302,500
Orange Redevelopment
Agency Tax Allocation
Revenue Bonds
5.700% due 10/01/17..................... 3,000,000 2,478,750
Palm Springs Financing
Authority Revenue Bonds
6.400% due 09/01/17..................... 3,000,000 2,737,500
Pittsburg Redevelopment
Agency Tax
Allocation Bonds
7.400% due 08/15/20..................... 3,040,000 2,983,000
Pomona Public Financing
Authority Revenue
Refunding Bonds
5.750% due 02/01/20..................... 10,000,000 7,912,500
Santa Cruz County Public
Financing Authority
Revenue Bonds
6.200% due 09/01/23..................... 2,000,000 1,677,500
Suisun City Redevelopment
Agency Tax
Allocation Bonds
7.250% due 10/01/20..................... 425,000 460,594
</TABLE>
9
<PAGE> 106
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
Tracy Community
Development Agency Toll
Road Revenue Bonds
6.000% due 03/01/24...................... 5,000,000 4,056,250
-----------
50,830,320
SCHOOLS--5.97%
Beaumont Unified School
District Certificates of
Participation
7.700% due 01/01/21...................... 1,000,000 985,000
Cucamonga School District
Certificates of
Participation
7.600% due 12/01/15...................... 1,000,000 1,022,500
Elk Grove Unified School
District Special
Tax Bonds
7.125% due 12/01/24...................... 1,000,000 1,016,250
Perris Union High School
District Certificates of
Participation
5.900% due 09/01/23...................... 2,000,000 1,667,500
San Gabriel Valley School
Financing Authority
Revenue Refunding Bonds
5.500% due 02/01/19...................... 1,500,000 1,215,000
Saugus Unified School
District Certificates of
Participation
7.500% due 08/01/09...................... 700,000 733,250
Sierra Unified School
District Certificates of
Participation
6.000% due 03/01/12...................... 2,000,000 1,707,500
Simi Valley Unified School
District Certificates of
Participation
6.100% due 08/01/22...................... 3,000,000 2,737,500
University of California
Certificates of Participation
5.500% due 11/01/14...................... 2,000,000 1,642,500
5.600% due 11/01/20...................... 6,180,000 4,990,350
Victor Valley Unified School
District Certificates of
Participation
7.875% due 11/01/12...................... 1,255,000 1,316,181
-----------
19,033,531
TRANSPORTATION--1.09%
San Diego MTDB Authority
Lease Revenue Bonds
5.375% due 06/01/23...................... 2,500,000 2,050,000
San Joaquin Hills
Transportation Corridor
Agency Toll Road
Revenue Bonds
6.750% due 01/01/32...................... 1,750,000 1,448,125
-----------
3,498,125
WASTE--2.98%
California Pollution Control
Financing Authority
Pollution Control
Revenue Bonds
5.850% due 12/01/23...................... 500,000 419,375
California Pollution Control
Financing Authority
Solid Waste Disposal
Revenue Bonds
6.875% due 11/01/27...................... 2,000,000 1,882,500
Stanislaus Waste to Energy
Financing Agency
Revenue Bonds
7.625% due 01/01/10...................... 1,000,000 1,007,500
Vallejo Sanitation and Flood
Control District
Certificates of Participation
5.000% due 07/01/19...................... 8,000,000 6,190,000
-----------
9,499,375
</TABLE>
10
<PAGE> 107
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
WATER--12.14%
Apple Valley Water District
Improvement Bonds
7.875% due 09/02/11...................... 2,425,000 2,500,781
California Department of
Water Resources
Central Valley Project
Revenue Bonds
5.500% due 12/01/23...................... 6,000,000 4,942,500
Calleguas-Las Virgines
Public Financing
Authority Revenue Bonds
5.125% due 07/01/21...................... 4,500,000 3,493,125
Central Coast Water
Authority Revenue Bonds
6.600% due 10/01/22...................... 3,200,000 3,132,000
East Bay Municipal Utility
District Water System
Revenue Refunding Bonds
6.000% due 06/01/12...................... 1,000,000 930,000
Metropolitan Water
District Waterworks
Revenue Bonds
5.000% due 07/01/20...................... 7,500,000 5,784,375
5.500% due 07/01/19...................... 5,000,000 4,181,250
Orange Cove Irrigation
District Revenue
Certificates of Participation
7.000% due 02/01/15...................... 2,500,000 2,409,375
7.250% due 02/01/12...................... 2,000,000 2,000,000
San Bernardino Municipal
Water Department
Certificates of Participation
6.250% due 02/01/17...................... 2,510,000 2,365,675
Santa Barbara Water and
Sewer Certificates of
Participation
6.700% due 04/01/27...................... 2,000,000 1,957,500
Turlock Irrigation District
Certificates of
Participation
7.300% due 01/01/11...................... 4,165,000 4,165,000
Turlock Irrigation District
Revenue Refunding
Bonds Series A
5.750% due 01/01/18...................... 1,000,000 873,750
------------
38,735,331
------------
TOTAL LONG-TERM
MUNICIPAL OBLIGATIONS
(Cost $342,717,564).......................... 309,418,394
SHORT-TERM
OBLIGATIONS--0.88%
VARIABLE RATE REVENUE
BONDS--0.88%
INDUSTRIAL
DEVELOPMENT--0.88%
California Pollution Control
Financing Authority
Pollution Control Revenue
Bonds Series A
5.000% due 01/03/95(B)................... 2,800,000 2,808,941
------------
TOTAL SHORT-TERM
OBLIGATIONS
(Cost $2,808,941)............................ 2,808,941
------------
TOTAL INVESTMENTS--97.89%
(Cost $345,526,505).......................... 312,227,335
CASH AND OTHER ASSETS,
LESS LIABILITIES--2.11%...................... 6,720,818
------------
NET ASSETS, at value,
equivalent to $9.28 per
share for 26,034,286
Class A Shares ($.01 par
value) outstanding and
$9.28 per share for
8,339,105 Class B Shares
($.01 par value)
outstanding--100.00%....................... $318,948,153
============
</TABLE>
(A) Floating rate securities.
(B) Interest rate reset date.
See Notes to Financial Statements.
11
<PAGE> 108
STATEMENT OF OPERATIONS/STATEMENTS OF CHANGES NET ASSETS
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
- --------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest................................... $ 23,033,267
------------
Expenses
Management fees............................ $ 1,919,101
Distribution expenses
(see Note D)............................. 1,114,370
Transfer agent fees........................ 244,131
Administrative service fees................ 158,594
Custodian fees............................. 100,287
Audit and legal fees....................... 39,491
Registration fees.......................... 36,394
Trustees' fees and expenses................ 27,905
Insurance expense.......................... 25,872
Shareholder reports........................ 23,859
Organization costs......................... 4,619
Miscellaneous.............................. 20,155
Less: Expense
reimbursement............................ (506,921) 3,207,857
----------- ------------
Net Investment Income.................. 19,825,410
------------
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS
Net realized loss on
investments.............................. (4,180,216)
Net change in unrealized
depreciation of
investments.............................. (51,218,323)
------------
Net realized and unrealized
Loss on Investments.................. (55,398,539)
------------
Decrease in net assets
resulting from operations............ $(35,573,129)
====================================================================
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income...................... $ 19,825,410 $ 16,517,620
Net realized gain (loss) on
investments.............................. (4,180,216) 9,880,178
Net change in unrealized
appreciation
(depreciation) of
investments.............................. (51,218,323) 9,798,946
------------ ------------
Increase (decrease) in net
assets resulting from
operations............................... (35,573,129) 36,196,744
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income-
Class A.................................. (15,737,105) (14,358,309)
Class B.................................. (3,992,716) (2,149,913)
Net realized gain on
investments-
Class A.................................. - (8,029,591)
Class B.................................. - (1,848,387)
------------ ------------
Total distributions to
shareholders......................... (19,729,821) (26,386,200)
------------ ------------
SHARE TRANSACTIONS
Increase in shares
outstanding................................ 29,122,142 91,709,279
------------ ------------
Increase (decrease) in
net assets................................. (26,180,808) 101,519,823
NET ASSETS
Beginning of year.......................... 345,128,961 243,609,138
------------ ------------
End of year................................ $318,948,153 $345,128,961
============ ============
Undistributed Net
Investment Income........................ $ 127,227 $ 31,638
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 109
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------------------------- ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------------------------------- ------------------------------
1994(1) 1993 1992(2) 1991 1990 1994(1) 1993 1992(2)
--------- -------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share income and capital changes
for a share outstanding during
each year:
Net asset value, beginning of year....... $ 10.85 $ 10.41 $ 10.32 $ 9.91 $ 10.00 $ 10.85 $ 10.41 $ 10.32
INCOME FROM
INVESTMENT OPERATIONS
Net investment income................... 0.58 0.62 0.66 0.69 0.74 0.51 0.54 0.58
Net realized and unrealized gain
(loss) on investments................. (1.57) 0.76 0.25 0.47 (0.16) (1.57) 0.76 0.25
--------- -------- -------- ------- -------- -------- -------- -------
Total from Investment Operations.... (0.99) 1.38 0.91 1.16 0.58 (1.06) 1.30 0.83
LESS DISTRIBUTIONS
Dividends from net investment
income................................ (0.58) (0.62) (0.67) (0.70) (0.67) (0.51) (0.54) (0.59)
Distributions from realized gains....... - (0.32) (0.15) (0.05) - - (0.32) (0.15)
--------- -------- -------- ------- -------- -------- -------- -------
Total Distributions................. (0.58) (0.94) (0.82) (0.75) (0.67) (0.51) (0.86) (0.74)
--------- -------- -------- ------- -------- -------- -------- -------
Net asset value, end of year............ $ 9.28 $ 10.85 $ 10.41 $ 10.32 $ 9.91 $ 9.28 $ 10.85 $ 10.41
======== ======== ======== ======= ======= ======== ======== =======
TOTAL RETURN(3)......................... (9.31)% 13.60% 9.15% 12.26% 6.13% (9.99)% 12.76% 8.35%
======== ======== ======== ======= ======= ======== ======== =======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average
net assets............................ 0.89% 0.87% 0.83% 0.80% 0.84% 1.64% 1.62% 1.60%
Ratio of expense reimbursement
to average net assets................. (0.14)% (0.18)% (0.25)% (0.40)% (0.84)% (0.14)% (0.18)% (0.25)%
======== ======== ======== ======= ======= ======== ======== =======
Ratio of net expenses to average
net assets............................ 0.75% 0.69% 0.58% 0.40% 0.00% 1.50% 1.44% 1.35%
======== ======== ======== ======= ======= ======= ======= =======
Ratio of net investment income
to average net assets................. 5.85% 5.69% 6.36% 6.75% 7.11% 5.10% 4.82% 5.43%
Portfolio turnover...................... 62% 51% 34% 45% 62% 62% 51% 34%
Net Assets, end of year
(in thousands)........................ $241,583 $279,692 $217,014 $163,693 $80,200 $77,365 $65,437 $26,595
</TABLE>
(1) December 22, 1994, John Hancock Advisers, Inc. became the Investment
Adviser. Prior to this date, Transamerica Fund Management Company was
the Investment Adviser.
(2) Per share information has been calculated using the average number of
shares outstanding.
(3) Total return does not include the effect of the initial sales charge for
Class A Shares nor the contingent deferred sales charge for Class B
Shares. Total return does include the benefit of a voluntary expense
reimbursement by the Investment Adviser. Without such benefit, total
return would be lower.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 110
NOTES TO FINANCIAL STATEMENTS
John Hancock California Tax-Free Income Fund
December 31, 1994
NOTE A--
SIGNIFICANT ACCOUNTING POLICIES
John Hancock California Tax-Free Income Fund (the ``Fund''), formerly
Transamerica California Tax-Free Income Fund, is a diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended. On December 16, 1994, the shareholders of each of the mutual
funds managed by Transamerica Fund Management Company (TFMC) voted to approve
new Investment Advisory contracts with John Hancock Advisers, Inc. Each such
approval was subject to the acquisition of TFMC by The Berkeley Financial Group
(known beginning January 1, 1995 as John Hancock Funds), the parent company of
John Hancock Advisers, Inc. The acquisition became effective December 22, 1994.
The Fund's name change was also effective on this date.
The Fund offers two classes of shares to the public. Class A Shares
are subject to an initial sales charge of up to 4.75% and a 12b-1 distribution
plan. Class B Shares are subject to a contingent deferred sales charge and a
separate 12b-1 distribution plan. The following is a summary of significant
accounting policies consistently followed by the Fund.
(1) The Fund values its investments by using quotations provided by
market makers, estimates of market value, or values received from an
independent pricing service. Securities for which market quotations are not
readily available are valued at a fair value as determined in good faith by the
Fund's Board of Trustees. Short-term investments are valued at amortized cost
(original cost plus amortized discount or accrued interest).
(2) Security transactions are accounted for on the trade date. Interest
income is accrued daily. Debt premiums and original issue discounts are
amortized using the yield-to-maturity method. Discounts other than original
issue are not amortized. Realized gains and losses from security transactions
are determined on the basis of identified cost for both financial reporting and
federal income tax purposes.
(3) Income dividends are declared daily by the Fund and paid to
shareholders or reinvested at net asset value monthly. Other distributions are
recorded on the ex-dividend date and may be reinvested at net asset value.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
Distributions payable to shareholders at December 31, 1994 were $907,182.
(4) No provision for federal income taxes has been made since it is the
Fund's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code. At December 31, 1994, the Fund had a realized capital loss
carryforward of approximately $268,000, which will expire in 2002.
(5) The Fund reports custodian fees net of credits and charges
resulting from cash positions in the custodial accounts greater than or less
than the amounts required to settle portfolio transactions. For the year ended
December 31, 1994, these amounts were $11,967 and $26,382, respectively.
(6) On a daily basis, income, unrealized and realized gains and losses,
and expenses which are not class specific are allocated to each class based on
their respective relative net assets. Class specific expenses, such as
distribution expenses, are applied to the class to which they are attributed.
NOTE B--
MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
From January 1, 1994 through December 21, 1994, TFMC acted as the
Investment Adviser to the Fund. On December 22, 1994, John Hancock Advisers,
Inc., a wholly-owned subsidiary of John Hancock Funds, became Investment
Adviser following the approval of the Fund's shareholders. Throughout these
financial statement notes, TFMC and John Hancock Advisers, Inc. are referred to
collectively as the ``Investment Adviser'', as each acted in this capacity
during the time periods noted above. The Investment Adviser has a sub-advisory
agreement with, and pays a fee to, Transamerica Investment Services, Inc. (the
``Sub-Adviser''). TFMC was, prior to December 22, 1994, and the Sub-Adviser is
presently a subsidiary of Transamerica Corporation.
The Fund's management fee is payable monthly and is calculated based on
the monthly average daily net assets of the Fund at an annual rate of 0.55%. At
December 31, 1994, the management fee payable to the Investment Adviser was
$118,703.
The Investment Adviser also provided administrative services to the
Fund pursuant to an administrative service agreement. During the year ended
December 31, 1994, the Fund paid or accrued $109,540 to the Investment Adviser
for these services, of which $13,620 was payable at December 31, 1994.
The Investment Adviser voluntarily agreed to reimburse the Fund for all
normal operating expenses, excluding distribution expenses, in excess of 0.60%,
on an annual basis, of the Fund's average daily net assets through December 31,
1994. For the year ended December 31, 1994, the Investment Adviser reimbursed
the Fund $506,921 pursuant to this agreement.
14
<PAGE> 111
NOTES TO FINANCIAL STATEMENTS
Continued
John Hancock California Tax-Free Income Fund
During the year ended December 31, 1994, Transamerica Fund
Distributors, Inc., an affiliate of TFMC and principal underwriter of the Fund
through December 21, 1994, and John Hancock Funds, Inc., an affiliate of John
Hancock Advisers, Inc. and principal underwriter since December 22, 1994,
retained $126,490 as their portion of the commissions charged on sales of Class
A Shares of the Fund. Throughout these financial statement notes, Transamerica
Fund Distributors, Inc. and John Hancock Funds, Inc. are referred to
collectively as the ``Distributor'', as each acted in this capacity during the
time periods noted above. At December 31, 1994, receivables from and payable
to the Distributor for Fund share transactions were $182,622 and $725,576,
respectively.
The Fund paid no compensation directly to any officer. Certain officers
of the Fund are affiliated with the Investment Adviser.
During the year ended December 31, 1994, the Fund paid legal fees of
$6,000 to Baker & Botts. A partner with Baker & Botts was an officer of the
Fund until December 22, 1994.
NOTE C--
COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the year ended December 31, 1994, purchases and sales of securities,
other than short-term obligations, aggregated $241,713,463 and $211,597,251,
respectively.
At December 31, 1994, receivables from brokers for securities sold were
$1,028,289. The identified cost of investments owned was the same for both
financial reporting and federal income tax purposes. At December 31, 1994, the
gross unrealized appreciation and gross unrealized depreciation of investments
for federal income tax purposes were $1,262,641 and $34,561,811, respectively.
NOTE D--
PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized under separate distribution plans to finance activities related to
the distribution of its Class A and Class B Shares (the ``Class A Plan'' and
the ``Class B Plan,'' respectively). The distribution plans, together with the
initial sales charge on Class A Shares and the contingent deferred sales charge
on Class B Shares, comply with the regulations covering maximum sales charges
assessed by mutual funds distributed through securities dealers that are NASD
members.
The Class A Plan and the Class B Plan permit each class to make
payments to the Distributor up to 0.15% annually of average daily net assets
for certain distribution costs such as service fees paid to dealers, production
and distribution of prospectuses to prospective investors, services provided to
new and existing shareholders and other distribution related activities. During
the year ended December 31, 1994, the Fund made payments to the Distributor of
$405,172 or 0.15% for Class A and $118,200 or 0.15% for Class B, related to the
above activities.
The Class B Plan also permits Class B to reimburse the Distributor up
to 0.75% annually of average daily net assets for costs related to compensation
paid to securities dealers, in place of an initial sales charge to investors,
on the sale of Class B Shares. These costs are based upon a commission payment
charge of 5% of the value of Class B Shares sold (excluding shares acquired
through reinvestment), reduced by the amount of contingent deferred sales
charges (CDSC) that have been received by the Distributor on redemptions of
Class B Shares. These costs also include a charge of interest (carrying charge)
at an annual rate of 1% over the prevailing prime rate to the extent cumulative
commission payment charges, plus any previous carrying charges, less CDSC
received by the Distributor, have not been paid in full by the Fund. For the
year ended December 31, 1994, Class B reimbursed the Distributor $590,998 or
0.75% for such costs. For the year ended December 31, 1994, the Distributor
received $302,402 in CDSC.
At December 31, 1994, Class A had $96,343 and Class B had $77,295
payable to the Distributor pursuant to the above distribution plans.
NOTE E--
ORGANIZATION
The Fund was organized as a Massachusetts business trust on October 17, 1989.
The Fund had no transactions between that date and December 31, 1989, the
date of the Fund's initial offering of shares to the public, other than the
sale at $10.00 per share (net asset value) of 10,000 shares to TFMC.
The organization expenses of the Fund have been deferred and are being
amortized over a period during which it is expected that a benefit will be
realized, but not longer than five years from the date of commencement of
operations.
15
<PAGE> 112
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE F--SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1994 1993
-------------------------- --------------------------
SHARES DOLLARS SHARES DOLLARS
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold-Class A........................................ 5,288,858 $ 54,343,070 6,222,367 $ 67,684,801
Shares sold-Class B........................................ 3,496,364 36,145,744 3,570,391 39,032,830
Shares issued in reinvestment of distributions-Class A..... 669,253 6,642,113 922,955 10,028,581
Shares issued in reinvestment of distributions-Class B..... 200,879 1,988,933 213,817 2,322,382
Shares redeemed-Class A.................................... (5,712,088) (56,313,131) (2,204,763) (24,012,146)
Shares redeemed-Class B.................................... (1,391,946) (13,684,587) (305,683) (3,347,169)
---------- ------------ ---------- ------------
Net increase in shares outstanding......................... 2,551,320 $ 29,122,142 8,419,084 $ 91,709,279
========== ============ ========== ============
</TABLE>
The components of net assets at December 31, 1994, are as follows:
<TABLE>
<S> <C>
Capital paid-in (unlimited number of shares authorized)................................................. $356,244,025
Undistributed net investment income..................................................................... 127,227
Accumulated net realized loss on investments............................................................ (4,123,929)
Net unrealized depreciation of investments.............................................................. (33,299,170)
------------
NET ASSETS.............................................................................................. $318,948,153
============
</TABLE>
16
<PAGE> 113
John Hancock California Tax-Free Income Fund
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
John Hancock California Tax-Free Income Fund
We have audited the accompanying statement of net assets of John Hancock
California Tax-Free Income Fund, formerly Transamerica California Tax-Free
Income Fund, as of December 31, 1994, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for each
of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of John Hancock California Tax-Free Income Fund at December 31, 1994,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 3, 1995
17
<PAGE> 114
John Hancock California Tax-Free Income Fund
FUND INFORMATION
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
OFFICERS
Edward J. Boudreau, Jr., Chairman and Chief Executive Officer
Robert G. Freedman, Vice Chairman and Chief Investment Officer
Thomas M. Simmons, President
Anne C. Hodsdon, Executive Vice President
James B. Little, Senior Vice President and Chief Financial Officer
Thomas H. Drohan, Senior Vice President and Secretary
Warren Schmalenberger, Senior Vice President
James K. Ho, Senior Vice President
Andrew F. St. Pierre, Senior Vice President
B.J. Willingham, Senior Vice President
Frank Lucibella, Vice President
James J. Stokowski, Vice President and Treasurer
Susan S. Newton, Vice President and Compliance Officer
John A. Morin, Vice President
Thomas J. Press, Vice President and Assistant Secretary
TRUSTEES
James F. Carlin
William H. Cunningham
Charles L. Ladner
Leo E. Linbeck
Patricia P. McCarter
Steven R. Pruchansky
Norman H. Smith
John P. Toolan
DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
TRANSFER AGENT
The Shareholder Services Group, Inc.
P.O. Box 9656
Providence, RI 02940-9656
1-800-343-6840
This material is not authorized for distribution unless preceded or
accompanied by a current prospectus.
The performance information referred to in this report is historical and does
not represent a guarantee of similar future results. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than the original cost.
- --------------------------------------------------------------------------------
IMPORTANT TAX INFORMATION
No portion of the distributions during the fiscal year qualifies for the
dividend received deduction.
The income dividends paid during the year ended December 31, 1994 were
reported to shareholders on Form 1099 in early 1995. Two percent of dividends
paid were from sources subject to alternative minimum tax (AMT) provisions.
Please consult your tax adviser to determine how this information impacts your
personal tax circumstances.
- --------------------------------------------------------------------------------
18
<PAGE> 115
CALIFORNIA PORTFOLIO
a series of
JOHN HANCOCK JOHN HANCOCK TAX-EXEMPT SERIES FUND
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s) Edward J.
Boudreau, Jr., Thomas H. Drohan and James B. Little, with full power of
substitution in each, to vote all the shares of beneficial interest of
California Portfolio, a series of John Hancock Tax-Exempt Series Fund (the
"Trust"), which the undersigned is (are) entitled to vote at the Special
Meeting of Shareholders (the "Meeting") of California Portfolio to be held at
101 Huntington Avenue, Boston, Massachusetts, on September 8, 1995 at 9:00
a.m., Boston time, and at any adjournment of the Meeting. All powers may be
exercised by a majority of said proxy holders or substitutes voting or acting,
or, if only one votes and acts, then by that one. Receipt of the Proxy
Statement dated July 16, 1995 is hereby acknowledged. If not revoked, this
proxy shall be voted:
(1) To approve an Agreement and Plan of Reorganization
between John Hancock California Tax-Free Income Fund
("California Fund") and the Trust, on behalf of
California Portfolio, providing for California Fund's
acquisition of all California Portfolio's assets in
exchange solely for Calfornia Fund's assumption of
California Portfolio's liabilities, and the issuance of
Class A shares of California Fund to California
Portfolio for distribution to its shareholders.
____ ____ ____
FOR :____: AGAINST :____: ABSTAIN :____:
(2) In the discretion of said proxy or proxies, to act upon
such other matters as may properly come before the
Meeting or any adjournment of the Meeting.
<PAGE> 116
THIS PROXY SHALL BE VOTED IN FAVOR OF (FOR) PROPOSAL (1) IF NO
SPECIFICATION IS MADE ABOVE. AS TO ANY OTHER MATTER, SAID PROXY
OR PROXIES SHALL VOTE IN ACCORDANCE WITH THEIR BEST JUDGMENT.
Date __________________, 1995 ________________________________
Signature(s)
________________________________
NOTE: Signature(s) should agree
with name(s) printed herein. When
signing as attorney, executor,
administrator, trustee or guardian,
please give your full title as
such. If a corporation, please
sign in full corporate name by
president or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE
<PAGE> 117
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
July 16, 1995
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the related Prospectus (also dated July 16, 1995)
which covers Class A and Class B shares of beneficial interest of John Hancock
California Tax-Free Income Fund ("California Tax-Free Income Fund") to be
issued in exchange for all of the net assets of California Portfolio
("California Portfolio"). Please retain this Statement of Additional
Information for future reference.
A copy of the Prospectus can be obtained free of charge by calling Shareholder
Services at 1-800-225-5291 or by written request to California Tax-Free Income
Fund at 101 Huntington Avenue, Boston, Massachusetts 02199.
TABLE OF CONTENTS
Page
----
Introduction ................................................... 3
Additional Information about California Tax-Free Income Fund ... 3
General Information and History
Investment Objectives and Policies
Management of California Tax-Free Income Fund
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Shares of Beneficial Interest
Purchase, Redemption and Pricing of
California Tax-Free Income Fund Shares
Underwriters
Calculation of Performance Data
Financial Statements
Additional Information About California Portfolio............... 4
General Information and History
Investment Objective and Policies
Management of California Portfolio
Control Persons and Principal Holders of Shares
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Shares of Beneficial Interest
Purchase, Redemption and Pricing of California Portfolio Shares
Underwriters
Calculation of Performance Data
Financial Statements
<PAGE> 118
EXHIBITS
A - Statement of Additional Information, dated January 1, 1995 of California
Portfolio.
B - Statement of Additional Information, dated May 1, 1995 of California
Tax-Free Income Fund.
C - Pro Forma Combined Financial Statements at December 31, 1994 and for the
period then ended of California Portfolio and California Tax-Free Income
Fund.
-2-
<PAGE> 119
INTRODUCTION
------------
This Statement of Additional Information is intended to supplement the
information provided in a Proxy Statement and Prospectus dated July 14, 1995
(the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus has
been sent to the shareholders of California Portfolio in connection with the
solicitation by the management of John Hancock Tax-Exempt Series Fund (the
"Trust") of proxies to be voted at the Special Meeting of Shareholders of
California Portfolio to be held on September 8, 1995. This Statement of
Additional Information includes the statements of additional information of
California Tax-Free Income Fund, dated May 1, 1995 (the "California Tax-Free
Income Fund SAI"), and California Portfolio, dated January 1, 1995 (the
"California Portfolio SAI"). The California Tax-Free Income Fund SAI and the
California Portfolio SAI are included with this Statement of Additional
Information and are incorporated herein by reference.
ADDITIONAL INFORMATION ABOUT CALIFORNIA TAX-FREE INCOME FUND
------------------------------------------------------------
General Information and History
- -------------------------------
For additional information about California Tax-Free Income Fund
generally and its history, see "Organization of the Fund" in the California
Tax-Free Income Fund SAI.
Investment Objectives and Policies
- ----------------------------------
For additional information about California Tax-Free Income Fund's
investment objectives and policies, see "Investment Objectives and Policies"
and "Investment Restrictions" in the California Tax-Free Income Fund SAI.
Management of California Tax-Free Income Fund
- ---------------------------------------------
For additional information about California Tax-Free Income Fund's
Board of Trustees, officers and management personnel, see "Those Responsible
for Management" in the California Tax-Free Income Fund SAI.
Investment Advisory and Other Services
- --------------------------------------
For additional information about California Tax-Free Income Fund's
investment adviser, custodian and independent accountants, see "Investment
Advisory and Other Services," "Distribution Contract," "Transfer Agent
Services," "Custody of Portfolio" and "Independent Auditors."
Brokerage Allocation and Other Practices
- ----------------------------------------
For additional information about California Tax-Free Income Fund's
brokerage allocation practices, see "Brokerage Allocation" in the California
Tax-Free Income Fund SAI.
-3-
<PAGE> 120
Shares of Beneficial Interest
- -----------------------------
For additional information about the voting rights and other
characteristics of California Tax-Free Income Fund's capital stock, see
"Description of the Fund's Shares" in the California Tax-Free Income Fund SAI.
Purchase, Redemption and Pricing of California Tax-Free Income Fund Shares
- --------------------------------------------------------------------------
For additional information about the determination of net asset value,
see "Net Asset Value" in the California Tax-Free Income Fund SAI.
Underwriters
- ------------
For additional information about California Tax-Free Income Fund's
principal underwriter and the distribution contract between the principal
underwriter and California Tax-Free Income Fund, see "Distribution Contract" in
the California Tax-Free Income Fund SAI.
Calculation of Performance Data
- -------------------------------
For additional information about the investment performance of
California Tax-Free Income Fund, see "Calculation of Performance" in the
California Tax-Free Income Fund SAI.
Financial Statements
- --------------------
Audited financial statements of California Tax-Free Income Fund as at
December 31, 1994 are set forth in the California Tax-Free Income Fund SAI
included herein as Exhibit B.
ADDITIONAL INFORMATION ABOUT CALIFORNIA PORTFOLIO
-------------------------------------------------
General Information and History
- -------------------------------
For additional information about California Portfolio generally and its
history, see "Organization of the Fund" in the California Portfolio SAI.
Investment Objectives and Policies
- ----------------------------------
For additional information about California Portfolio's investment
objectives, policies and restrictions see "Investment Objective and Policies"
and "Investment Restrictions" in the California Portfolio SAI.
Management of California Portfolio
- ----------------------------------
For additional information about the Trust's Board of Trustees,
officers and management personnel, see "Those Responsible for Management" in
the California Portfolio SAI.
-4-
<PAGE> 121
Control Persons and Principal Holders of Shares
- -----------------------------------------------
For additional information about control persons of California Portfolio
and principal holders of shares of California Portfolio see "Those Responsible
for Management" in the California Portfolio SAI.
Investment Advisory and Other Services
- --------------------------------------
For additional information about California Portfolio's investment
adviser, custodian and independent accountants, see "Investment Advisory and
Other Services," "Distribution Contract," "Transfer Agent Services," "Custody
of Portfolio" and "Independent Auditors" in the California Portfolio SAI.
Brokerage Allocation and Other Practices
- ----------------------------------------
For additional information about California Portfolio's brokerage
allocation practices, see "Brokerage Allocation" in the California Portfolio
SAI.
Shares of Beneficial Interest
- -----------------------------
For additional information about the voting rights and other
characteristics of shares of beneficial interest of California Portfolio, see
"Description of the Fund's Shares" in the California Portfolio SAI.
Purchase, Redemption and Pricing of California Portfolio Shares
- ---------------------------------------------------------------
For additional information about the determination of net asset value,
see "Net Asset Value" in the California Portfolio SAI.
Underwriters
- ------------
For additional information about California Portfolio's principal
underwriter and the distribution contract between the principal underwriter and
California Portfolio, see "Distribution Contract" in the California Portfolio
SAI.
Calculation of Performance Data
- -------------------------------
For additional information about the investment performance of California
Portfolio, see "Calculation of Performance" in the California Portfolio SAI.
Financial Statements
- --------------------
Audited financial statements of California Portfolio as at August 31,
1994 are set forth in the California Portfolio SAI included herein as Exhibit
A. Pro Forma combined financial statements as at December 31, 1994 and for the
period then ended for California Portfolio as though the Reorganization had
occurred on December 31, 1994 are attached as Exhibit C.
-5-
<PAGE> 122
Exhibit A
JOHN HANCOCK
TAX-EXEMPT SERIES FUND
CALIFORNIA PORTFOLIO
MASSACHUSETTS PORTFOLIO
NEW YORK PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1995
This Statement of Additional Information provides information about
John Hancock Tax-Exempt Series Fund (the "Fund") and its three portfolios, the
California Portfolio, the Massachusetts Portfolio and the New York Portfolio
(each a "Portfolio" and together, the "Portfolios") in addition to the
information that is contained in the Fund's Prospectus dated January 1, 1995.
This Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Fund's Prospectus, a copy of which can
be obtained free of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
STATEMENT OF CROSS-
ADDITIONAL REFERENCED TO
INFORMATION CAPTIONS IN
PAGE PROSPECTUS
PAGE
Organization of the Fund 2 12
Investment Objective and Policies 2 6
Certain Investment Practices 6 6
Special Risks 9 9
Investment Restrictions 25 6
Ratings 27 28
Those Responsible For Management 31 13
Investment Advisory And Other Services 36 13
Distribution Contract 38 14
Methods Of Obtaining Reduced Sales 40 19
Charge
Special Redemptions 41 --
Additional Services And Programs 41 24
Tax Status 42 14
State Income Tax Information 45 15
1
<PAGE> 123
Net Asset Value 48 19
Description Of The Fund's Shares 48 19
Calculation Of Performance 50 16
Brokerage Allocation 51 ---
Transfer Agent Services 53 Back Cover
Custody Of Portfolio 53 Back Cover
Independent Accountants 53 Back Cover
Financial Statements -- ---
ORGANIZATION OF THE FUND
John Hancock Tax-Exempt Series Fund is an open-end management
investment company presently consisting of three non-diversified separate
portfolios.
California Portfolio (the "California Portfolio"). The California Portfolio is
intended to provide investors with current income excludable from gross income
for Federal income tax purposes and exempt from the personal income tax of
California, consistent with preservation of capital.
Massachusetts Portfolio (the "Massachusetts Portfolio"). The Massachusetts
Portfolio is intended to provide investors with current income excludable from
gross income for Federal income tax purposes and exempt from the personal
income tax of Massachusetts, consistent with preservation of capital.
New York Portfolio (the "New York Portfolio"). The New York Portfolio is
intended to provide investors with current income excludable from gross income
for Federal income tax purposes and exempt from the personal income tax of
New York State and New York City, consistent with preservation of capital.
The Fund was organized in March 1987 by John Hancock Advisers, Inc. (the
"Adviser") as a Massachusetts business trust under the laws of the Commonwealth
of Massachusetts. Prior to January 2, 1991, when the Fund changed its
name, it was known as John Hancock Tax-Exempt Series Trust. The Adviser is an
indirect wholly-owned subsidiary of John Hancock Mutual Life Insurance Company
(the "Life Insurance Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide income excludable from gross
income for Federal income tax purposes and exempt from the personal income
taxes of, as the case may be, California, or Massachusetts, or New York
State and New York City, consistent with preservation of capital. For a
discussion of each Portfolio's investment objective and policies, investors
should refer to the caption "Investment Objective and Policies" in the
Prospectus. As defined in this Statement of Additional Information, "Tax-Exempt
Bonds" and tax-exempt securities refer to debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is excludable from gross income for
Federal income tax purposes, without regard to whether the interest income
thereon is exempt from the personal income tax of any state.
2
<PAGE> 124
TAX-EXEMPT BONDS. Tax-Exempt Bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Tax-Exempt Bonds may be issued include the refunding of outstanding obligations
or obtaining funds for general operating expenses. In addition, certain types
of "private activity bonds" may be issued by public authorities to finance
privately operated housing facilities and certain local facilities for water
supply, gas, electricity, or sewage or solid waste disposal, student loans, or
the obtaining of funds to lend to public or private institutions for the
construction of facilities such as educational, hospital and housing
facilities. Such private activity bonds are included within the term
Tax-Exempt Bonds if the interest paid thereon is excluded from gross income for
Federal income tax purposes.
Other types of private activity bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may also constitute Tax-Exempt Bonds, but current
Federal tax law places substantial limitations on the size of such issues.
NOTES. TAX-EXEMPT NOTES generally are used to provide for short-term
capital needs and generally have maturities of one year or less. Tax-Exempt
Notes include:
1. PROJECT NOTES. Project notes are backed by an agreement between a local
issuing agency and the Federal Department of Housing and Urban Development
("HUD") and carry a United States Government guarantee. These notes provide
financing for a wide range of financial assistance programs for housing,
redevelopment, and related needs (such as low-income housing programs and
urban renewal programs). Although they are the primary obligations of the
local public housing agencies or local urban renewal agencies, the HUD
agreement provides for the additional security of the full faith and credit of
the United States Government. Payment by the United States pursuant to its
full faith and credit obligation does not impair the tax-exempt character of
the income from Project Notes.
2. TAX-ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various tax revenues, such as income, sales, use and
business taxes, and are specifically payable from these particular future tax
revenues.
3. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued
in expectation of receipt of specific types of revenue, other than taxes,
such as federal revenues available under Federal Revenue Sharing Programs.
4. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. In most
cases, the long-term bonds then provide the funds for the repayment of the
Notes.
5. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are
applied to the payment of Construction Loan Notes, is sometimes provided by a
commitment by the Government National Mortgage
3
<PAGE> 125
Association to purchase the loan, accompanied by a commitment by the Federal
Housing Administration to insure mortgage advances thereunder. In other
instances, permanent financing is provided by the commitments of banks to
purchase the loan.
COMMERCIAL PAPER. Issues of commercial paper typically represent short-term,
unsecured, negotiable promissory notes. These obligations are issued by
agencies of state and local governments to finance seasonal working capital
needs of municipalities or to provide interim construction financing and are
paid from general revenues of municipalities or are refinanced with long-term
debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit
facility agreements offered by banks or other institutions.
YIELDS. The yields on Tax-Exempt Bonds depend on a variety of factors,
including general money market conditions, effective marginal tax rates,
the financial condition of the issuer, general conditions of the
Tax-Exempt Bond market, the size of a particular offering, the maturity of
the obligation and the rating (if any) of the issue. The ratings of
Moody's Investors Service ("Moody's"), Fitch Investors Service ("Fitch")
and Standard & Poor's Rating Group ("Standard & Poor's") represent their
opinions as to the quality of various Tax-Exempt Bonds which they
undertake to rate. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, Tax-Exempt Bonds
with the same maturity and interest rate with different ratings may have
the same yield. Yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement
of interest rates, due to such factors as changes in the overall demand or
supply of various types of Tax-Exempt Bonds or changes in the investment
objectives of investors.
"MORAL OBLIGATION" BONDS. No Portfolio currently intends to invest in
so-called "moral obligation" bonds, where repayment is backed by a moral
commitment of an entity other than the issuer, unless the credit of the
issuer itself, without regard to the "moral obligation," meets the investment
criteria established for investments by the Portfolio.
LOWER RATED HIGH YIELD "HIGH RISK" DEBT OBLIGATIONS. As discussed in
the Fund's Prospectus, the Fund may invest in high yielding, fixed income
securities rated Baa or lower by Moody's or BBB or lower by Standard & Poor's
or Fitch. Ratings are based largely on the historical financial
condition of the issuer. Consequently, the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial
condition, which may be better or worse than the rating would indicate.
The values of lower-rated securities generally fluctuate more than those
of high-rated securities. In addition, the lower rating reflects a
greater possibility of an adverse change in financial condition affecting the
ability of the issuer to make payments of interest and principal. Although
the Adviser seeks to minimize these risks through diversification,
investment analysis and attention to current developments in interest rates
and economic conditions, there can be no assurance that the Adviser will
be successful in limiting the Fund's exposure to the risks associated with
lower securities. Because the Fund invests in securities in the lower rated
categories, the achievement of the Fund's goals is more dependent on the
Adviser's ability than would be the case if the Fund were investing in
securities in the higher rated categories.
4
<PAGE> 126
The market value of debt securities which carry no equity participation
usually reflects yields generally available on securities of similar
quality and type. When such yields decline, the market value of a
portfolio already invested at higher yields can be expected to rise if
such securities are protected against early call. In general, in
selecting securities for its portfolio, the portfolio manager of each
Portfolio intends to seek protection against early call. Similarly,
when such yields increase, the market value of a portfolio already
invested at lower yields can be expected to decline. The portfolio's may
invest in debt securities which sell at substantial discounts from par.
These securities are low coupon bonds which, during periods of high
interest rates, because of their lower acquisition cost tend to sell on a
yield basis approximating current interest rates.
ADDITIONAL RISKS. Securities in which a Portfolio may invest are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by Congress or, as the case may be, the
California, Massachusetts, or New York legislature extending the time
for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay when due principal of and
interest on their Tax-Exempt Bonds may be materially affected.
From time to time, proposals have been introduced before Congress which would
adversely affect the Federal income tax consequences of holding Tax-Exempt
Bonds. Federal tax legislation enacted primarily during the 1980's limits
the types and amounts of Tax-Exempt Bonds issuable for certain purposes,
especially for industrial development bonds and other types of
so-called "private activity" bonds. Such limits may affect the future
supply and yields of these types of Tax-Exempt Bonds. Further proposals
limiting the issuance of Tax-Exempt Bonds may well be introduced in the
future. If it appeared that the availability of Tax-Exempt Bonds for
investment by a Portfolio and the value of the Portfolio's investments could
be materially affected by such changes in law, the Trustees would
reevaluate such Portfolio's investment objective and policies and
consider changes in the structure of the Portfolio or its dissolution.
PORTFOLIO TURNOVER. It is impossible to predict portfolio turnover
rates accurately. The portfolio turnover rate for a Portfolio is calculated
by dividing the lower of that Portfolio's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of all securities whose
maturities at the time of acquisition were 1 year or less) by the monthly
average value of the securities in the Portfolio during the year.
RATINGS. Ratings for Bonds issued by various jurisdictions are noted herein.
Such ratings reflect only the respective views of such organizations, and an
explanation of the significance of such ratings may be obtained from the
rating agency furnished the same. There is no assurance that a rating will
continue for any given period of time or that a rating will not be revised
or withdrawn entirely by any or all of such rating agencies, if, in its or
their judgment, circumstances so warrant. Any downward revision or
withdrawal of a rating could have an adverse effect on the market prices of
any of the bonds described herein.
5
<PAGE> 127
CERTAIN INVESTMENT PRACTICES
"WHEN-ISSUED" SECURITIES. As discussed in the Prospectus, "when-issued"
refers to securities whose terms are available and for which a market
exists, but which have not yet been issued. If a Portfolio enters into a
"when-issued" transaction, the Portfolio will segregate in a separate account,
cash or liquid high-grade debt securities equal in value to its commitment to
acquire "when-issued" securities. These assets will be valued at market
value daily, and additional cash or liquid assets will be segregated, in the
separate account to the extent the total value of the assets in the
account declines below the amount of such commitment.
REPURCHASE AGREEMENTS. As discussed in the Prospectus, a Portfolio
may enter into repurchase agreements with respect to its portfolio
securities. Each Portfolio has established a procedure providing that the
securities serving as collateral for each repurchase agreement must be
delivered to such Portfolio's custodian either physically or in book-entry
form and that the collateral must be marked-to-market daily to ensure
that each repurchase agreement is fully collateralized at all times. In
the event of bankruptcy or other default by a seller of a repurchase
agreement, a Portfolio could experience delays in liquidating the
underlying securities and could experience losses, including the
possible decline in the value of the underlying securities during the
period in which the Portfolio seeks to enforce its rights thereto, possible
subnormal levels of income and lack of access to income during this period,
and the expense of enforcing its rights. It is the present intention of the
Portfolios to enter into repurchase agreements only with respect to
obligations of the U.S. Government or its agencies or instrumentalities
pending investment or reinvestment of assets in portfolio securities or
pending the anticipated payment of redemption proceeds. The Portfolios
will enter into repurchase agreements only with member banks of the Federal
Reserve System and with "primary dealers" in U.S. Government securities. It
is a fundamental policy of each Portfolio not to invest more than 10% of
its net assets in illiquid securities, including repurchase agreements
maturing in more than 7 days.
FINANCIAL FUTURES CONTRACTS. As discussed in the Prospectus, a Portfolio
may hedge its portfolio by selling financial futures contracts to offset the
effect of expected increases in interest rates and by purchasing such
futures contracts to offset the effect of expected declines in
interest rates. Although other techniques could be used to reduce a
Portfolio's exposure to interest rate fluctuations, a Portfolio may be able
to hedge its exposure more effectively and economically by using financial
futures contracts. A portfolio may enter into futures contracts and related
options for hedging and speculative purposes to the extent permitted by the
regulations of the Commodity Futures Trading Commission ("CFTC").
Financial futures contracts have been designed by boards of trade which have
been designated "contract markets" by the CFTC. Futures contracts are
traded on these markets in a manner that is similar to the way a stock is
traded on a stock exchange. The boards of trade, through their clearing
corporations, guarantee that the contracts will be performed. Currently,
financial futures contracts are based on interest rate-sensitive
instruments such as long-term U.S. Treasury bonds, U.S. Treasury notes,
Government National Mortgage Association ("GNMA") modified pass-through
mortgage-backed securities, three-month U.S. Treasury bills, 90-day
commercial paper, bank certificates of deposit, the municipal bond
buyer index, and Eurodollar certificates of deposit. It is expected that
if other financial futures contracts are developed and traded, a
Portfolio may engage in transactions in such contracts.
6
<PAGE> 128
Although financial futures contracts by their terms call for actual
delivery or acceptance of interest rate instruments, in most cases these
contracts are closed out prior to delivery by offsetting purchases or sales
of matching financial futures contracts (same exchange, underlying
security and delivery month). If the offsetting purchase price is
less than a Portfolio's original sale price, such Portfolio realizes a gain,
or if it is more, the Portfolio realizes a loss. Conversely, if the
offsetting sale price is more than a Portfolio's original purchase price,
such Portfolio realizes a gain, or if it is less, the Portfolio realizes a
loss. A Portfolio will pay a commission in connection with each purchase or
sale of financial futures contracts, including a closing out transaction.
For a discussion of the Federal income tax considerations of trading in
financial futures contracts, see the information under the caption "Tax
Status" below.
At the time a Portfolio enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
Government securities, known as "initial margin," ranging upward from 1 1/10
percent of the value of the financial futures contract being traded or $3,000,
whichever is more. The margin required for a financial futures
contract is set by the board of trade or exchange on which the contract is
traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on
the financial futures contract which is returned to a Portfolio upon
termination of the contract, assuming all contractual obligations have
been satisfied. The Portfolios expect to earn interest income on their
initial margin deposits. Each day, the futures contract is valued at
the official settlement price of the board of trade or exchange on which it is
traded. Subsequent payments, known as "variation margin," to and from the
broker, are made on a daily basis as the market price of the financial futures
contract fluctuates. This process is known as "marking to the market."
Variation margin does not represent the borrowing or lending by a
Portfolio, but is instead settlement between the Portfolio and the broker of
the amount one would owe the other if the financial futures contract expired
at that time. In computing net asset value, a Portfolio will mark to the
market its open financial futures positions.
Successful hedging depends on a strong correlation between the market for
the portfolio securities being hedged and the futures contract market for those
securities. There are several factors that will probably prevent this
correlation from being perfect, and thus, even a correct forecast of general
interest rate trends may not result in a successful hedging transaction.
There are significant differences between the securities and futures
markets which could create an imperfect correlation between the markets and
which could impair the effectiveness of a given hedge. The degree
of imperfection of correlation depends on circumstances such as: variations
in speculative market demand for financial futures and debt securities,
including technical influences in futures trading and differences
between the financial instruments underlying the standard financial futures
contracts available for trading in such respects as interest rate levels,
maturities, and creditworthiness of issuers. The degree of imperfection may
be increased where the underlying debt securities are lower-rated and,
thus subject to greater fluctuation in prices than higher-rated
securities. In addition, the degree of imperfection may also be increased by
the fact that the Portfolios will enter into financial futures contracts on
taxable securities, and there is no guarantee that the prices of taxable
securities will move in a similar manner to the prices of a Portfolio's
tax-exempt securities.
7
<PAGE> 129
A decision as to whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of market behavior or unexpected interest rate trends.
Although the Adviser believes that the use of financial futures contracts
will benefit the Portfolios, an incorrect prediction could result in a
loss on both the hedged securities in a Portfolio's investments and
hedging vehicle so that a Fund's return might have been better had hedging
not been attempted. However, in the absence of the ability to hedge, the
Adviser might have taken portfolio actions in anticipation of the same
market movements with similar investment results but, presumably, at greater
transaction costs. The low margin deposits required for futures transactions
permit an extremely high degree of leverage. A relatively small
movement in a futures contract may result in losses or gains in excess of the
amount invested.
Futures exchanges may limit the amount of fluctuation permitted in price of
certain futures contract during a single trading day. The daily limit
establishes the maximum amount by which the price of a futures contract may
vary either up or down from the previous day's settlement price. Once
the daily limit has been reached in a futures contract subject to the
limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading
day and, therefore, does not limit potential losses because the limit
may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some holders of futures
contracts to substantial losses.
Finally, although a Portfolio engages in financial futures transactions
only on boards of trade or exchanges where there appears to be an adequate
secondary market, there is no assurance that a liquid market will exist for a
particular futures contract at any given time. The liquidity of the
market depends on participants closing out contracts rather than making or
taking delivery. In the event participants decide to make or take
delivery, liquidity in the market could be reduced. In addition, a Portfolio
could be prevented from executing a buy or sell order at a specified price or
closing out a position due to limits on open positions or daily price
fluctuation limits imposed by the exchanges or boards of trade. If a
Portfolio cannot close out a position, it will be required to continue
to meet margin requirements until the position is closed.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. As discussed in the Portfolios'
Prospectus, a Portfolio may purchase and write call and put options on
financial futures contracts. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in
a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise, the writer of the option delivers
the futures contract to the holder at the exercise price. A Portfolio
would be required to deposit with its custodian initial and variation margin
with respect to put and call options on futures contracts written by it.
Options on futures contracts involve risks similar to those risks relating to
transactions in financial futures contracts described above. Also, an
option purchased by a Portfolio may expire worthless, in which case a
Portfolio would lose the premium paid therefor.
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OTHER CONSIDERATIONS. The Portfolios will engage in futures transactions
for bona fide hedging or speculative purposes to the extent permitted by CFTC
regulations. A Portfolio will determine that the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the
Portfolio or which it expects to purchase. Except as stated below, the
Portfolios' futures transactions will be entered into for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a
decline in the price of securities that a Portfolio owns, or futures
contracts will be purchased to protect the Portfolio against an increase in
the price of securities or the currency in which they are denominated it
intends to purchase. As evidence of this hedging intent, the Fund expects
that on 75% or more of the occasions on which it takes a long futures or
option position (involving the purchase of futures contracts), the Fund
will have purchased or will be in the process of purchasing, equivalent
amounts of related securities or assets denominated in the related currency
in the cash market at the time when the futures or, option position
is closed out. However, in particular cases, when it is economically
advantageous for a Portfolio to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Portfolios to elect to comply with
a different test, under which the aggregate initial margin and premiums
required to establish speculative positions in futures contracts and options
on futures will not exceed 5% of the net asset value of a Portfolio's
portfolio, after taking into account unrealized profits and losses on any
such positions and excluding the amount by which such options were
in-the-money at the time of purchase. Each Portfolio will engage in
transactions in futures contracts and options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
for maintaining its qualification as a regulated investment company for federal
income tax purposes.
When a Portfolio purchases a futures contract, writes a put option
thereon or purchases a call option thereon, an amount of cash or high
grade, liquid debt securities will be deposited in a segregated account with
the Portfolio's custodian which is equal to the underlying value of the
futures contract reduced by the amount of initial and variation margin held in
the account of its broker.
The investment practices described above under the caption "Certain
Investment Practices" are not fundamental and may be changed by the Trustees
without shareholder approval.
SPECIAL RISKS
The following information as to certain special risks associated with
investing in California, Massachusetts and New York constitutes
only a brief summary and does not purport to be a complete description of
the considerations associated with such investments. The information is
based in part on information from official statements related to
securities offerings of California, Massachusetts and New York issuers and is
believed to be accurate.
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California Tax-Exempt Bonds
General
From mid-1990 until late 1993, California has endured a prolonged economic
recession coupled with deteriorating fiscal and budget conditions. During
this period, the state has also contended with natural disasters including
fires, a prolonged drought and a major earthquake in the Los Angeles area
(January 1994), rapidly growing population, and increasing social service
requirements. Unlike the early 1980's, the diverse California economy has not
yet staged a major rebound to quickly carry the state out of this downturn.
The California economy has begun to show encouraging signs of growth since
the start of 1994. After two years of unemployment rates over 9%, ongoing job
losses and company relocation's out-of-state, California has begun to
register net job growth. Sectors exhibiting employment growth have
been the construction and related manufacturing, wholesale, and retail
trade industries, transportation, and recreation, business, and
management consulting services. This growth has offset the slowing losses in
the aerospace industry and restructuring of the finance and utility sectors.
Over the next two years, nonfarm employment is projected to remain stable in
1994 but expand by 6.1% in 1995. These trends are expected to continue and
allow the State's recovery to gain momentum over the next two years.
The lingering recession has seriously impacted California tax revenues and
produced the need for additional expenditures on health and welfare
services. Since the late 1980's, the State's Administrations have recognized
that its budget problems stem in part from a structural imbalance. The
largest General Fund programs - K-12 schools and community colleges,
health and welfare, and corrections have been increasing faster than the
revenue base, driven by the State's rapid population growth.
General Fund expenditures exceeded revenues for four of the five fiscal years
ended 1991-92. These structural concerns will be exacerbated in coming
years by the expected need to substantially increase capital and operating
funds for corrections as a result of a "Three Strikes" law enacted in 1994.
The principal sources of the State's general fund revenues are the
California personal income tax (44% of total revenues), sales and use tax
(38%) and bank and corporation taxes (12%). The State maintains a Special
Fund for Economic Uncertainties derived from general fund revenues as a reserve
to meet cash needs of the general fund but which is required to be replenished
as soon as sufficient revenues are available. At the end of Fiscal Year
1993 - 1994, this fund was expected to have a negative balance of $771 million.
Recent Budgets
The State failed to enact its 1992-93 budget by July 1, 1992. Although the
State had no legal authority to pay many of its vendors, certain
obligations (such as debt service, school
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apportionments, welfare payments, and employee salaries) were payable
because of continuing or special appropriations, or court orders.
However, the State Controller did not have enough cash to pay as they came due
all of these ongoing obligations, as well as valid obligations incurred in the
prior fiscal year.
Starting on July 1, 1992, the Controller was required to issue "registered
warrants" in lieu of normal warrants backed by cash to pay many State
obligations. Available cash was used to pay constitutionally mandated and
priority obligations. Between July 1 and September 3, 1992, the
Controller issued an aggregate of approximately $3.8 billion of registered
warrants all of which were called for redemption by September 4, 1992
following enactment of the 1992-93 Budget Act and issuance by the State of
short-term notes.
The 1992-93 Budget Act, when finally adopted, was projected to eliminate
the State's accumulated deficit, with additional expenditure cuts and a
$1.3 billion transfer of State education funding costs to local governments
by shifting local property taxes to school districts. However, as the
recession continued longer and deeper than expected, revenues once again
were far below projections, and only reached a level just equal to the
amount of expenditures, so the State continued to carry its $2.8 billion
budget deficit as of June 30, 1993.
The 1993-94 Budget Act was similar to the prior year, in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a
two-year plan to eliminate the accumulated deficit by borrowing into the
1994-95 fiscal year. With the recession still continuing longer than
expected, the General Fund had $800 million less revenue and $800
million higher expenditures than budgeted. As a result, revenues only
exceed expenditures by about $500 million. However, this was the first
operating surplus in four years and reduced the accumulated deficit to $2.0
billion, after taking into account certain other accounting reserves.
Current Budget
The 1994-95 Budget Act was passed on July 8, 1994, and provides for an
estimated $41.9 billion of General Fund revenues, and $40.9 billion of
expenditures. The budget assumed receipt of about $750 million of new
federal assistance for the costs of incarceration, education, health
and welfare related to undocumented immigrants. Other major components
of the budget include further reductions, in health and welfare costs,
some additional transfers of funds from local government, and a plan to
defer retirement of $1 billion of the accumulated budget deficit until
the 1995-96 fiscal year. The Federal government has apparently budgeted only
$33 million of this immigration aid. However, this shortfall is expected to be
almost fully offset by higher than projected revenues, and lower than
projected caseload growth as the economy improves.
Because of the accumulated budget deficit over the past several years, the
payment of certain unbudgeted expenditures to schools to maintain constant
per-pupil aid levels, and a reduction of the level of available internal
borrowing, the State's cash resources have been significantly depleted. This
has required the State to rely on a series of external borrowings for the
past several years to pay its normal expenses, including borrowings which have
gone past the end of the fiscal year. In February, 1994, the State
borrowed $3.2 billion, maturing by December, 1994.
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In July, 1994, the State borrowed a total of $7.0 billion to meet its cash
flow requirements for the 1994-95 fiscal year and to fund part of its
deficit into the 1995-96 fiscal year. A total of $4.0 billion of this
borrowing matures in April, 1996. The State will continue to have to rely on
external borrowing to meet its cash needs to the foreseeable future.
In order to assure repayment of the $4 billion, 22-month borrowing,
the State enacted legislation (the "Trigger Law") which can lead to
automatic, across-the-board cuts in General Fund expenditures in either the
1994-95 or 1995-96 fiscal years if cash flow projections made at
certain times during those years show deterioration from the projections made
in July 1994 when the borrowings were made. On November 15, 1994, the
State Controller as part of the Trigger Law reported that the cash
position of the General Fund on June 30, 1995 would be about $580 million
better than earlier projected, so no automatic budget adjustments were
required in 1994-95. The Controller's report showed that loss of federal
funds was offset by higher revenues, lower expenditures, and certain other
increases in cash resources.
Orange County
On December 7, 1994, Orange County, California (th "County"), together
with its pooled investment fund (the "Fund") filed for protection under
Chapter 9 of the Federal Bankruptcy Code, after reports that the Fund had
suffered significant market losses in its investments caused a liquidity
crisis for the Fund and the County. Approximately 180 other public
entities, most but not all located in the County, were also depositors
in the Fund. As of December 13, 1994, the County estimated the Fund's loss
at about 27% of its initial deposits of around $7.4 billion. These losses
could increase as the County sells investments to restructure the
Fund, or if interest rates rise. Many of the entities which kept moneys in
the Fund, including the County, are facing cash flow difficulties because of
the bankruptcy filing and may be required to reduce programs or capital
projects. The County and some of these entities have, and others may in
the future, default in payment of their obligations. Moody's and Standard
& Poor's have suspended, reduced to below investment grade levels, or
placed on "Credit Watch" various securities of the County and the entities
participating in the Fund.
The State of California has no obligation with respect to any obligations
or securities of the County or any of the other participating entities,
although under existing legal precedents, the State may be obligated to
ensure that school districts have sufficient funds to operate.
Rating Actions
The ongoing structural imbalances, growing accumulated deficits, and sluggish
recovery of the California economy have placed the State under on going
scrutiny from the municipal credit rating agencies. In July 1994,
both Moody's and Standard & Poor's lowered their ratings on the State's
general obligation debt. Moody's dropped the State from a rating of Aa to
Al and S&P reduced the rating from A+ to A. Fitch lowered its rating from
Aa to A. Despite the progress in producing break-even financial operations,
the agencies concluded that the State still confronts a continuing fiscal
challenge. The major concerns cited by the agencies included the failure to
directly address most of the accumulated deficit, the potential for the
untried budget triggers to produce draconian cuts in program expenditures,
high short-term debt and optimistic revenue forecasts.
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Institutional Considerations
Changes in California laws during the last two decades have limited
the ability of California State and municipal issuers to obtain sufficient
revenue to pay their bond obligations.
In 1978 California voters approved an amendment to the California Constitution
known as Proposition 13. Proposition 13 limits ad valorem (according to
value) taxes on real property and restricts the ability of taxing
entities to increase real property taxes and assessments, and limits the
ability of local governments to raise other taxes.
Article XIII B of the California Constitution (the Appropriation Limit)
imposes a limit on annual appropriations. Originally adopted in 1979,
Article XIII B was modified by Proposition 98 in 1988 and Proposition III in
1990. The appropriations subject to the Article consist of tax proceeds
which include tax revenues and certain other funds. Excluded from the
Appropriation Limits are prior (pre 1979) debt service and subsequent debt
incurred as the result of voter authorizations, court mandates, related to
Proposition III, qualified capital outlay projects and certain increases in
gasoline taxes and motor vehicle weight fees. Certain civil disturbance
emergencies declared by the Governor and appropriations approved by a
two-thirds vote of the legislature are excluded from the determination
of excess appropriations, and the appropriations limit may be overridden by
local voter approval for up to a four-year period..
On November 8 1988, California voters approved Proposition 98, a combined
initiative constitutional amendment and statute called "the Classroom
Instruction Improvement and Accountability Act". This amendment changed
school funding below the University level by guaranteeing K-14 schools
a minimum share of General Fund Revenues. Suspension of the Proposition
98 funding formula requires a two-thirds vote of Legislature and the
Governor's concurrence. Proposition 98 also contains provisions
transferring certain funds in excess of the Article XIII B limit to K-14
schools.
As amended by Proposition 111, the Appropriation Limit is recalculated
annually by taking the actual Fiscal Year 1986-1987 limit and applying the
Proposition 111 cost of living and population adjustments as if that limit
had been in effect. The Appropriations Limit is tested over consecutive two
year periods under this amendment. Any excess "proceeds of taxes" received
over such two year period above the Appropriation Limits for the two year
period is divided equally between transfers to K-14 districts and taxpayers.
Throughout the next two fiscal years, the State's financial difficulties
are expected to remain severe. As more operational and fiscal
responsibilities are shifted to local governments, there will be additional
pressure exerted upon local governments, especially counties and school
districts which rely upon State aid.
Certain debt obligations held by the California Portfolio may be payable
solely from lease payments on real property leased to the State, counties,
cities or various public entities structured in such a way as to not
constitute a debt to the leasing entity. To ensure that a debt is not
technically created, California law requires that the lessor can
proportionally reduce its lease payments equal to its loss of beneficial
use and occupancy. Moreover, the lessor does not agree
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to pay lease payments beyond the current period; it only agrees to include
lease payments in its annual budget every year. In the event of a default,
the only remedy available against the lessor is that of reletting the
property; no acceleration of lease payments is permitted.
The California Portfolio also holds debt obligations payable solely
from the revenues of health care institutions. Certain provisions under
California state law may adversely affect these revenues and, consequently,
payment of those debt obligations.
The Federally sponsored Medicaid program for health care services to eligible
welfare recipients is known as the Medi-Cal program. In the past, the
Medi-Cal program has provided a cost-based system of reimbursement for
inpatient care furnished to Medi-Cal beneficiaries by any eligible
hospital. The State now selectively contracts by county with
California hospitals to provide reimbursement for non-emergency inpatient
services to Medi-Cal beneficiaries, generally on a flat per-diem payment
basis regardless of cost. California law also permits private health plans
and insurers to contract selectively with hospitals for services to
beneficiaries on negotiated terms, generally at rates lower than standard
charges.
Debt obligations payable solely from revenues of health care institutions
may also be insured by the state pursuant to an insurance program
operated by the Office of Statewide Health Planning and Development (the
"Office"). Most of such debt obligations are secured by a mortgage of real
property in favor of the Office and the holders. If a default occurs
on such insured debt obligations, the Office has the option of either
continuing to meet debt service obligations or foreclosing the mortgage and
requesting the State Treasurer to issue debentures payable from a reserve fund
established under the insurance fund or payable from appropriated state funds.
Security for certain debt obligations held by the California Portfolio may
be in form of a mortgage or deed of trust on real property. California has
statutory provisions which limit the remedies of a creditor secured by a
mortgage or deed of trust. Principally, the provisions establish conditions
governing the limits of a creditor's right to a deficiency judgment. In
the case of a default, the creditor's rights under the mortgage or deed
of trust are subject to constraints imposed by California real property law
upon transfers of title to real property by private power of sale. These
laws require that the loan must have been in arrears for at least seven
months before foreclosure proceedings can begin. Under California's
antideficiency legislation, there is no personal recourse against a mortgagor
of a single-family residence regardless of whether the creditor chooses
judicial or non-judicial foreclosure. These disruptions could disrupt the
stream of revenues available to the issuer for paying debt service.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on
such mortgage loans may be imposed only with respect to voluntary payments
made during the first five years of the mortgage loan, and cannot in any
event exceed six months advance interest on the amount prepaid in
excess of 20% of the original principal amount of the mortgage loan. This
limitation could affect the flow of revenues available to the issuer for
debt service on these outstanding debt obligations.
Substantially all of California is located within an active geologic
region subject to major seismic activity. Any California municipal
obligation in the California Portfolio could be affected by an interruption
of revenues because of damaged facilities, or, consequently, income tax
deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance
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could be constrained by the inability of (1) an issuer to have obtained
earthquake insurance coverage at reasonable rates; (2) an issuer to
perform on its contract of insurance in the event of widespread losses; or (3)
the Federal or State government to appropriate sufficient funds within their
respective budget limitations.
The January 1994 major earthquake in greater Los Angeles (Northridge)
registered 6.8 on the Richter Scale and was estimated to have resulted in up
to $20 billion in property damage. Significant damage was incurred by public
and private facilities in four counties. Los Angeles, Ventura, Orange and
San Bernadino Counties were declared State and Federal disasters. The Federal
government approved a total of $9.5 billion in earthquake relief funds for
assistance to homeowners and small business as well as repair of damaged public
facilities.
Massachusetts Tax-Exempt Bonds
Partially as a result of income tax rate increases, state income tax revenues
increased from fiscal 1990 to $5.045 billion (excluding $298.3 million
collected pursuant to certain 1989 tax legislation) in fiscal 1991. These
figures represent an increase of approximately 13.0%. State income tax revenues
in fiscal 1992 were $5.337 billion, which represents an increase from fiscal
1991 of approximately 5.8%. Income tax revenues in fiscal 1993 were $5.375
billion, an increase of approximately 0.7% from fiscal 1992. Income tax
revenues for fiscal 1994 were approximately $5.690 billion, an increase of
5.9% from fiscal 1993. Income tax revenues for fiscal 1995 are currently
expected to be approximately $6.093 billion, an increase of 7.1% from fiscal
1994. As a result of a slowing rate of growth in certain tax revenue
categories, including the income tax, the Secretary of Administration and
Finance recently reduced the total fiscal 1995 tax revenue estimate by $75
million.
Fiscal 1991
In FY 1991 the Commonwealth issued $1.416 billion Fiscal Recovery Bonds to
finance a fiscal 1990 deficit of $1.104 billion. The bonds, which must be
repaid by the end of the 1997 calendar year, are payable from a 15%
dedicated portion of the Commonwealth's income tax receipts.
FY 1991 closed with an operating loss of approximately $21.2 million, however,
the receipt of $513 million from the Federal government for Medicaid
payments and the application of the adjusted FY 1990 fund balance resulted in a
final budgetary surplus of $237.1 million. Pursuant to state finance law, $59.2
million was reserved in the Commonwealth's Stabilization Fund.
Fiscal 1992
FY 1992 ended with an excess of revenues over expenditure of $312.3 million and
a positive fund balance of $549.4 million, including $230.4 million in the
Stabilization Fund. Budgeted revenues increased approximately .7% from FY 1991
to 413728 billion. Budgeted expenditures were 1.7% lower than FY 1991
budgeted expenditures, or $13.42 billion. Spending for certain human services
was higher than initially estimated, including an increase of $268.7 million
for the Medicaid program and $50 million for mental retardation requirements.
FY 1992 budgeted expenditures for Medicaid were $2.818 billion, or 1.9% higher
than FY 1991. This increase compared favorably with the 19% average annual
growth rate of Medicaid expenditures for FY's 1988 through 1991.
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Appropriations for the General Relief and the Group Health Insurance programs
were among the appropriations reduced by the Governor prior to signing the FY
1992 budget. The Legislature overrode the Governor's $376 million reduction
of the Group Health Insurance appropriation, which would have increased the
state employee and retiree shares of health insurance costs from 10% to 25%.
The General Relief program was abolished and replaced by Emergency Aid to the
Elderly, Disabled and Children, which is estimated to have reduced expenditures
in FY 1992 by $55.1 million, or 29.1% from the prior year.
After payment in full of the quarterly Local Aid distribution of $514 million,
retirement of the Commonwealth's outstanding commercial paper, and certain
other short-term borrowings, the Commonwealth reported a year-end cash position
of approximately $731 million.
Fiscal 1993
The Commonwealth ended FY 1993 with a surplus of revenues over expenditures of
$13.1 million and aggregate ending operating fund balance of approximately
$562.5 million. Budgeted revenues and other sources increased 4.7% over FY
1992 and totaled approximately $14.710 billion, representing a 9.5% increase
over the prior fiscal year.
After payment of all Local Aid and retirement of short-term debt, the
Commonwealth showed a year-end cash position of approximately $622.2 million,
as compared to a projected $485.1 million.
Fiscal 1994
The Commonwealth is in the process of closing its fiscal 1994 financial
records. Financial information for Fiscal year 1994 is unaudited.
The Department of Revenue's preliminary figures indicate fiscal 1994 tax
revenue collections were $10.606 billion, $88 million below the Department of
Revenue's fiscal year 1994 tax revenue estimate of $10.694 billion. Fiscal
1994 tax revenue collections were $676 million above fiscal 1993 tax revenues
of $9.930 billion. Budgeted revenues and other sources, including non-tax
revenues, collected in fiscal 1994 by the Executive Office for Administration
and Finance have been approximately $15.551 billion. Budgeted expenditures and
other uses of funds in fiscal 1994 were approximately $15.533 billion.
As of June 30, 1994, the Commonwealth showed a year-end cash position of
approximately $757 million, as compared to a projected position of $599
million.
In June, 1993, the Legislature adopted and the Governor signed into law
comprehensive education reform legislation. This legislation required an
increase in expenditures in fiscal 1994 for education purposes of approximately
$175 million above the fiscal 1993 base spending of $1.288 billion. The
Executive Office for Administration and Finance expects the annual increases
in expenditures above the fiscal 1993 base spending of $1.288 billion to be
approximately $396 million in fiscal 1995, $632 million in fiscal 1996 and $875
million in fiscal 1997. Additional annual increases are also expected in later
fiscal years. The fiscal 1995 budget signed by the Governor includes $396
million in appropriations to satisfy this legislation.
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Fiscal 1995
On July 10, 1994, the Governor signed into law the fiscal 1995 budget, which,
together with expected supplemental appropriations relating to welfare and
certain other programs, as described below, provides for approximately $16.3
billion in fiscal 1995 expenditures. The Governor exercised his authority to
veto and reduce individual line items and reduced total expenditures by
approximately $298.2 million and vetoed certain other law changes contained in
the fiscal 1995 budget, including approximately $296.9 million in
appropriations for the Office of Human Services and the Department of Public
Welfare, representing four months of funding for the Commonwealth's welfare
programs. The Governor plans to refile his proposal to eliminate the cash grant
portion of the Aid to Families With Dependent Children (AFDC) program and
create an Employment Support program, as well as request budgetary
authorization to fund welfare expenditures for the last four months of fiscal
1995 under a reformed welfare system. The fiscal 1995 expenditure estimate of
$16.3 billion assumes a full year of funding for the Commonwealth welfare
program.
Budgeted revenues and other sources to be collected in fiscal 1995 are
estimated by the Executive Office for Administration and Finance to be
approximately $16.3 billion. This amount includes estimated fiscal 1995 tax
revenues of $11.309 billion, which is approximately $703 million higher than
fiscal 1994 tax revenues of $10.606 billion. The fiscal 1995 tax revenue
amount represents the $11.328 billion consensus tax revenue estimate jointly
endorsed in May, 1994 by the Secretary for Administration and Finance and the
Chairmen of the House and Senate Ways and Means Committees in connection with
preparation of the fiscal 1995 budget, less $19.3 million of tax cuts signed by
the Governor in the 1995 budget. In addition, the final fiscal 1994
supplemental appropriations bill as passed by the House includes a provision to
raise the "no tax status" for heads of households and joint filers. This
proposal, if enacted, would result in an $18.9 million reduction in fiscal 1995
tax revenues.
In recent months, the rate of growth in certain tax revenue categories,
including, in particular, the income tax, has slowed. Fiscal 1994 tax revenues
were approximately $87 million below the Department of Revenue's tax revenue
estimate of $10.694 billion. On September 26, 1994, as required by law, the
Secretary for Administration and Finance revised the fiscal 1995 tax revenue
estimate to $11.234 billion, as reduction of approximately $75 million from the
most recent estimate. This amount represented the $11.328 billion consensus tax
revenue estimate jointly endorsed in May, 1994 by the Secretary for
Administration and Finance and the Chairmen of the House and Senate Ways and
Means Committees in connection with preparation of the fiscal 1995 budget, less
$19.3 million of tax cuts signed by the Governor in the fiscal 1995 budget,
less $19.3 million of tax cuts signed by the Governor in the fiscal 1995
budget. The Executive Office for Administration and Finance expects to offset
this reduction through a combination of spending reductions and certain
expected increases in non-tax revenues in order to maintain a balanced budget
for fiscal 1995. See also "Fiscal 1994."
The fiscal 1995 budget is based on numerous spending and revenue estimates, the
achievement of which cannot be assured. To date, the House has overridden
$296.9 million of the Governor's vetoes relating to certain welfare programs
contained in the fiscal 1995 budget as well as certain law changes which may
have a financial impact on the Commonwealth. The Senate is now considering
these overrides. The Senate initially voted to sustain the Governor's veto.
However,
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a motion to reconsider this vote is pending and could be considered at any time
before the end of the current legislative session. The override of other vetoes
has not yet been considered by the Legislature and it is possible that the
Legislature may vote to override such vetoes later in fiscal 1995. The
$16.482 billion of fiscal 1995 expenditures includes a reserve against certain
contingencies currently in the amount of $102.7 million. On October 7, 1994,
the Governor filed a supplemental appropriation recommendation
aggregating approximately $44.5 million. These expenditures are included in the
$102.7 million contingency reserve for fiscal 1995 expenditures. Additional
supplemental appropriations may be required for fiscal 1995, although the
actual amount of supplemental appropriations will not be determined until
after the review of agency spending plans expected to be completed in the fall.
The reserves of the Massachusetts Unemployment Compensation Trust Fund had been
exhausted mainly due to the high levels of unemployment in the State. Between
September 1991 and May 1994, benefit payments in excess of contributions were
financed through repayable advances from the federal unemployment loan account.
Legislation enacted in 1992 significantly increased employer contributions in
order to reduce advances from the federal loan account and 1993 contributions
exceeded benefit outlays by more than $200 million. All federal advances were
paid in May 1994 and since that time, the Trust Fund has been solvent.
As of August 31, 1994, the Trust Fund was running a surplus of $187
million. Interest on Federal advances of $4.7 million was paid in
September. The Department of Employment and Training estimates that the
additional increases in contributions provided by the new legislation should
result in a positive balance in the Trust Fund by December 1994 and rebuild
reserves in the system to almost $1 billion by the end of 1998.
The fiscal viability of the Commonwealth's authorities and municipalities is
inextricably linked to that of the Commonwealth. The Commonwealth guarantees
the debt of several authorities, most notably the Massachusetts Bay
Transportation Authority and the University of Massachusetts Building
Authority. Their ratings are based on this guarantee and can be expected to
move in tandem. Several other authorities are funded in part or in whole by
the Commonwealth and their debt ratings may be adversely affected by a
negative change in that of the Commonwealth.
Furthermore, certain of the Commonwealth's cities and towns have at times
experienced serious financial difficulties which have adversely affected their
credit standing. The recurrence of such financial difficulties, or
financial difficulties of the Commonwealth, could adversely affect the
market values and marketability of, or result in payment default on,
outstanding obligations by the Commonwealth or its public authorities or
municipalities. In addition, Massachusetts statutes which limit the taxing
authority of the Commonwealth or certain Massachusetts governmental entities
may impair the ability of issuers of some Massachusetts obligations to
maintain debt service on their obligations.
In Massachusetts the tax on personal property and real estate is virtually the
only source of tax revenues available to cities and towns to meet local
costs. "Proposition 2 1/2," an initiative petition adopted by the
voters of the Commonwealth of Massachusetts on November 1980, limits the
power of Massachusetts cities and towns and certain tax-supported districts
and public agencies to raise revenue from property taxes to support
their operations including the payment of certain debt service.
Proposition 2 1\2 required many cities and towns to reduce their property tax
levies to a stated percentage of the full and fair cash value of their taxable
real estate and
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personal property and limited the amount by which the total property taxes
assessed by all cities and towns might increase from year to year.
Ratings
In September, 1992, Standard & Poor's raised its ratings on the
Commonwealth's general obligation debt and related guaranteed bonds from
"BBB" to "A". Moody's also revised its rating from "Baa" to "A" and Fitch
maintained its "A" rating with a stable trend. The rating upgrades
reflect an improved financial management, greater cooperation between the
executive branch and the legislature, and improved budgeting for both
operations and capital plans.
In October, 1993, Standard & Poor's and Fitch raised Massachusetts' general
obligation ratings from "A" to "A+", citing continued improvements in the
Commonwealth's budgeting and financial management and the apparent
stabilization of the Massachusetts economy. Moody's currently rates The
Commonwealth's general obligation debt to A1.
New York Tax-Exempt Bonds
The following section provides only a brief summary of the complex
factors affecting the financial situation in New York and is based on
information obtained from the State, certain of its authorities and the City,
as publicly available on the date of this Statement of Additional
Information. The information contained in such publicly available
documents has not been independently verified. It should be noted
that the creditworthiness of obligations issued by local issuers may be
unrelated to the creditworthiness of the State, and that there is no
obligation on the part of the State to make payment on such local
obligations in the event of default in the absence of a specific guarantee
of pledge provided by the State. It should also be noted that the fiscal
stability of New York State is related to the fiscal stability of New York
City and of the State's Authorities. New York State's experience has been
that if New York City or any other major political subdivision or any of the
State's Authorities suffers serious financial difficulty, the ability of New
York State, New York State's political subdivisions (including New York
City) and the State's Authorities to obtain financing in the public
credit markets is adversely affected. This results in part from the
expectation that to the extent that any Authority or local government
experiences financial difficulty, it will seek and receive New York State
financial assistance. Moreover, New York City accounts for
approximately 40 percent of New York State's population and tax
receipts, so New York City's financial integrity in particular affects
New York State directly. Accordingly, if there should be a default by New
York City or any other major political subdivision or any of the
State's Authorities, the market value and marketability of all New York
Tax-Exempt Bonds issued by New York State, its political subdivisions
and Authorities ("New York Tax-Exempt Bonds") could be adversely affected.
This would have an adverse effect on the asset value and liquidity of the
Portfolio, even though securities of the defaulting entity may not be
held by the Portfolio.
Regional Economy
The New York State economy has started to slowly recover from the national
recession of 1990. After lagging the nation's modest recovery by almost
two years, expansion in health and business services and additions to the
construction and finance sectors netted the State approximately
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100,000 new jobs since early 1993. This marked the reversal of three
straight years of job losses which produced an unemployment rate of 8.5%
in 1992. Personal income during Fiscal Year 1994 increased by over 6%
following three years with increases averaging 3.5%.
The State Financial Plan, as revised, calls for the continuation of moderate
growth during calendar year 1994 and 1995. Industries involved with
the exports to the rest of the country and internationally are expected to
benefit from growing national and international markets and modest
employment growth is expected to be led by the construction, FIRE and trade
sectors in both the upstate and downstate regions. Similarly, wage and
personal income growth is projected to expand at a 4-5% rate. Continued
cutbacks by the military, local government, industrial and utility companies
will dilute the gains made in other sectors. Employment growth is
expected to slacken, however, in calendar year 1995 when the pace of the
national economic growth is projected to weaken. Entire industries are
expected to adjust to changing markets and the State's economy is expected to
absorb the full impact of those developments.
1994-1995 Fiscal Year
The State issued its second quarterly update to the cash-basis 1994-95 State
Financial Plan on October 28, 1994. Revisions have been made to estimates of
both receipts and disbursements, based on: (1) updated economic forecasts for
both the nation and the State, (2) an analysis of actual receipts
and disbursements through the first six months of the fiscal year, and
(3) an assessment of changing program requirements and cost savings
initiatives. The update projects a year-end surplus of $14 million in
the General Fund, with estimated receipts reduced by $267 million and
estimated disbursements reduced by $281 million, compared to the State
Financial Plan as initially formulated. The updated State economic forecast
is marginally weaker than that on which the initial formulation of the State
Financial Plan was based. The forecast calls for employment to increase in
1994 and 1995. Employment growth will moderate in 1995 when the pace of
national economic growth is projected to slacken and entire industries
adjust to changing markets and the State's economy absorbs the full impact
of these developments. Personal income is estimated to increase by 5.3
percent in 1994, and at a more moderate rate in 1995.
Based on the revised economic outlook and actual receipts for the first six
months of the 1994-95 fiscal year, projected General Fund receipts for the
1994-95 fiscal year have been reduced by $267 million. Estimates of the
yield of the personal income tax were lowered by $334 million, primarily
reflecting weak estimated tax collections through September and lower
withholding collections due to reduced expectations for wage and salary
growth during the balance of the year. Business tax receipts were also
reduced modestly, however, these reductions were partially offset by
increases in the general business corporation and utility taxes. Estimates
in all other receipt categories were increased by a total of $113 million.
The largest increases were in the sales tax, reflecting collections to date
and the revised economic outlook, and estate taxes which were buoyed by
unexpectedly large collections during the first six months of the 1994-95
fiscal year. Increases were also made in estimates for the real property
gains tax and the real estate transfer tax, based on strong collections
to date. Minor increases in estimates were made to the cigarette
and tobacco taxes, miscellaneous receipts and transfers from other funds.
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Disbursements through the first six months of the 1994-1995 fiscal year
also fell short of projections. The shortfall, totaling $153 million, was
in part attributable to changes in the timing of payments. However, lower
spending trends were evident in certain programs, most notably in payments for
social services programs. Projections of 1994-95 General Fund disbursements
have been reduced by $281 million, with savings in virtually every category
of the State Financial Plan. Payments for social services programs are
projected to be $140 million lower than projected in the State Financial
Plan as initially formulated. Other reductions reflect lower pension costs,
increased health insurance dividends, debt management savings, and slower
spending for certain programs and capital projects. Higher spending is
projected for a single program - the Department of Correctional Services -
to accommodate an unanticipated increase in the State's prison population.
The major uncertainties in the 1994-95 State Financial Plan continue to
be those related to the economy and tax collections, and could produce
either favorable or unfavorable variances during the balance of the
year. While adjustments to the forecast have been made to reflect
emerging relative weakness in the financial services industry, due in large
part to currency and credit market volatility, it is possible that the
weakness in that sector could precipitate further deterioration in State
receipts. On the other hand, recent evidence suggests that the national
economy may perform better than projected, with potentially beneficial
short-term results on State receipts.
1993-1994 Fiscal Year
The State of New York completed its 1993-1994 fiscal year (ending March 30,
1994) with an accumulated surplus of $370 million from combined Governmental
Funds. This includes a General Fund accumulated deficit of $1.637
billion, a Capital Fund accumulated deficit of $622 million, and accumulated
surpluses in the Special Revenue and Debt Service Funds. On an operating
basis, the State reported an operating surplus of $1.051 billion from
combined Governmental Funds.
General Fund operations completed Fiscal Year 1993-1994 with a surplus of
$914 million reported on GAAP-basis. The surplus reflects several major
factors including the use of $671 million of the 1992-1993 operating
surplus to fund 1993-1994 expenditures, $575 million in net Local
Government Assistance Corporation ("LGAL") bond proceeds, and the
accumulation of a $265 million balance in the Contingency Reserve.
Receipts of the General Fund increased $800 million or 2.5% over the prior
fiscal year. Primarily, the increase stemmed from gains of over $1 billion
in personal income and business taxes. This 10% growth was driven by the
changes in Federal business laws and the strong performance of the banking
and securities firms in 1993. Expenditures increased $1.05 billion or 3.2%
over the prior year. The growth in expenditures primarily consisted of $850
million in additional social service costs. The majority of these costs
related to Medicaid and Income Maintenance programs. In addition, the
settlement of outstanding labor contracts and unfavorable judicial decisions
caused another $240 million in departmental operations expenditures. On a
cash basis the state closed 1993-1994 with a surplus of $332 million based
upon receipts of $32.2 billion and disbursements of $31.9 billion.
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Fiscal Year 1992-1993
In 1992-1993, the State recorded a GAAP-based General Fund operating
surplus of $2.065 billion and ended the years with an accumulated General
Fund deficit of $2.5 billion. The year was highlighted by higher than
expected revenue growth generated by the improving economy combined with the
effects of a tax-induced one-time year end acceleration of income into 1992.
After reflecting a 1992-1993 year-end deposit to the tax refund reserve of
$671 million, General Fund receipts exceeded 1992 projections by $45
million. If not for that year-end transaction, which had the effect of
reducing 1992-1993 receipts by $671 million and making them available in
Fiscal Year 1993-1994, General Fund receipts would have been $716
million higher than originally projected. The favorable revenue performance
was primarily attributable to the withholding and estimated tax
components of the income tax exceeding projections by $800 million.
Disbursements ended 1992-1993 at $45 million above projections. After
adjusting for the impact of a $150 million payment from the Medicaid
Malpractice Insurance Association to health insurers pursuant to January 1993
legislation, all other expenditures fell $105 million below projections.
The State closed Fiscal Year 1992-1993 with a cash-basis surplus of $67
million based on receipts of $31.4 billion and disbursements of $30.8
billion.
Fiscal Year 1991-1992
The State of New York General Fund posted a GAAP-based operating surplus of
$1.7 billion and an accumulated fund deficit of $4.6 billion. This year
was marked by protracted delay in the adoption of the budget,
disagreement between the Executive and Legislature over revenue and
disbursement projections, and continuing deterioration in the state economy.
Fiscal Year 1991-1992 marked the fourth consecutive year in which New York
incurred a cash-basis operating deficit in the General Fund and issued
deficit note estimates and projections of New York operating results
were revised on several occasions throughout the year to reflect changing
economic and financial conditions. For the year, the General Fund incurred a
cash-basis deficit of $575 million which was financed from a $44 million
withdrawal from the Tax Stabilization Reserve Fund and the issuance of $531
million in TRANS in March 1992.
Ratings
The State of New York had its A rating by Moody's and A- by Standard &
Poor's reconfirmed during June 1994 and July 1994, respectively. In
affirming the ratings of long term general obligations both agencies cited
the positive trends establish over the last two fiscal years. Fitch also
retained its A+ rating on New York State.
CURRENT BUDGET The revised Fiscal Year 1994-1995 budget was developed
from projections of moderate economic growth and slightly higher
expectations regarding social service case loads and required State
services and slightly lower estimates of tax receipts. The budget calls for a
balanced General Fund on a cash basis. Total receipts are projected to
increase to $34.1 billion and expenditures to $34.0 billion. The
1994-1995 revenue projections incorporate a $1.5 billion
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transfer from the tax refund reserve fund, a rate sustaining the 1993-94
income tax growth and moderate user tax expansion. Disbursement estimates
call for a $1.9 billion increase in grants to local education governments
consisting primarily of $554 million increase in local education support
and a $143 million local tax relief package. In addition, increased
disbursement for pension contributions of $110 million, salary increases of
$193 million and a $153 million capital fund contribution represent
significant new expenditures. At the close of 1994-1995, the balance of the
Tax Stabilization Reserve Fund is projected to total $207 million.
New York State anticipates that its 1994-1995 borrowings for capital
purposes will total approximately $3.1 billion in general obligation and
contractual obligation debt. Of this issuance, general obligations
will total only $375 million, the lowest level since 1988-1989. Major
projects to be undertaken with these funds include highway and bridge
improvements, mental hygiene facilities, university building improvements,
housing programs and prisons.
AUTHORITIES The fiscal stability of New York is related, at least in
part, to the fiscal stability of its localities and Authorities.
Authorities are not subject to the constitutional restrictions on the
incurrence of debt which apply to New York itself and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their
legislative authorization.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway
tolls, mass transportation and rentals for dormitory rooms and housing. In
recent years, however, New York has provided financial assistance through
appropriations, in some cases of a recurring nature, to certain Authorities for
operating and other expenses and, in fulfillment of its commitments on
moral obligation indebtedness or otherwise, for debt service. This
assistance is expected to continue to be required in future years. Failure of
New York to appropriate necessary amounts or to take other action to permit
the Authorities to meet their obligations could result in a default by one
or more of the Authorities. If a default were to occur, it would likely
have a significant adverse effect on the market price of obligations of the
State and its Authorities.
As of March 31, 1994, there was outstanding a $26.4 billion aggregate
principal amount of bonds and notes issued by Authorities which were
either guaranteed by the State or supported by the State through
lease-purchase and contractual- obligation arrangements or moral obligation
provisions. Debt service on outstanding Authority obligations is normally
paid out of revenues generated by the Authorities' projects or programs, but
in recent years the State has provided special financial assistance, in
some cases of a recurring nature, for operating capital and debt service
expenses.
AGENCIES AND LOCALITIES Beginning in 1975 (in part as a result of the then
current New York City and UDC financial crises), various localities of
New York State began experiencing difficulty in marketing their
securities. As a result, certain localities, in addition to New York
City, have experienced financial difficulties leading to requests for State
assistance. If future financial difficulties cause agencies or localities
to seek special State assistance, this could adversely affect New York
State's ability to pay its obligations. Similarly, if financial
difficulties of New York State result in New York City's inability to
meet its regular aid commitments or to provide further emergency financing,
issuers may default on their outstanding obligations, which would affect the
marketability of debt obligations of New York, its agencies and
municipalities such as the New York Municipal Obligations held by the
Portfolio.
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Reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of New York State's localities.
Should localities be adversely affected by Federal cutbacks, they may
seek additional assistance from the State which might, in turn, have an
adverse impact on New York State's ability to maintain a balanced budget.
NEW YORK CITY AND THE MUNICIPAL ASSISTANCE CORPORATION In 1975, New York
City encountered severe financial difficulties which impaired the borrowing
ability of New York City, New York State, and the Authorities. New York City
(the "City") lost access to public credit markets and was not able to sell
debt to the public until 1979.
As a result of the City's financial difficulties, certain organizations
were established to provide financial assistance and oversee and review
the City's financing. These organizations continue to exercise various
monitoring functions relating to the City's financial position.
New York City has maintained a balanced budget for each of its last nine
fiscal years and has retired all of its federally guaranteed debt. As a
result of the City's success in balancing its budget, certain restrictions
imposed on the City by the new York Financial Control Board (the "Control
Board"), which was created in response to the City's 1975 fiscal crises,
have been suspended. Those restrictions, including the Control Board's
power to approve or disapprove certain contracts, long-term and short-term
borrowings and the four-year financial plan of the City, will remain
suspended unless and until, among other things, there is a substantial threat
of an actual failure by New York City to pay debt service on its notes and
bonds or to keep its operating deficits below $100 million. Although the
City has maintained a balanced budget in recent years, the ability to
balance future budgets is contingent upon accrual versus expected levels of
Federal and State Aid and the effects of the economy on City revenues and
services.
The City requires certain amounts of financing for seasonal and capital
spending purposes. The City has issued $2.2 billion in notes to finance the
City's current estimate of its seasonal financing needs during its 1995
fiscal year. The City's capital financing program projects long-term
financing requirements of approximately $11.3 billion for the City's
fiscal years 1995 through 1998 for the construction and rehabilitation
of the City's infrastructure and other fixed assets. The major capital
requirements include expenditures for the City's water supply system,
sewage and waste disposal systems, roads, bridges, mass transit, schools and
housing.
Certain localities in addition to the City could have financial problems
which, if significant, could lead to requests for additional State
assistance during the State's 1994-95 fiscal years and thereafter. Fiscal
difficulties experienced by the City of Yonkers, for example, could result
in State actions to allocate State resources in amounts that cannot
yet be determined. In the recent past, the State provided substantial
financial assistance to its political subdivisions, totaling approximately
67% of General Fund disbursements in the State's fiscal year 1992-93 and
estimated to account for 68% of General Fund disbursements in the State's
1993-94 fiscal year, primarily for aid to elementary, secondary and higher
education (34% in fiscal year 1992-93 and 34% in fiscal year 1993-94 of
local assistance) and medicaid and income maintenance (33% in fiscal year
1992-93 and 34% in fiscal year 1993-94). The legislature enacted substantial
reductions for previously budgeted levels of State aid since December 1990.
To the extent the
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State is constrained by its financial condition, State assistance to
localities may be further reduced, compounding the serious fiscal
constraints already experienced by many local governments. Localities also face
anticipated and potential problems resulting from pending litigation
(including challenges to local property tax assessments), judicial decisions
and socio-economic trends.
The total indebtedness of all localities in the State, other than New York
City, was approximately $15.7 billion as of the localities' fiscal
year ending during 1992. A small portion (approximately $71.6 million) if
this indebtedness represented borrowing to finance budgetary deficits
issued pursuant to enabling State legislation (requiring budgetary
review by the State Comptroller). Subsequently, certain counties and
other local governments have encountered significant financial
difficulties, including Nassau County and Suffolk County (which each
received approval by the legislature to issue deficit notes). The State
has imposed financial control on the City of New York from 1977 to 1986 and
on the City of Yonkers in 1984, 1988 and 1989, under an appointed control
board in response to fiscal crises encountered by these municipalities.
LITIGATION Certain litigation pending against New York State, its
subdivisions and their officers and employees could have a substantial or
long-term adverse effect on State finances. Among the more significant of
these lawsuits are those that involve: (i) the validity and fairness of
certain eighteenth century agreements and treaties by which Oneida and Cayuga
Indian tribes transferred title to the State of approximately five
million acres of land in central New York; (ii) certain aspects of the
State's Medicaid rates and regulations, including reimbursements to providers
of mandatory and optional Medicaid services; (iii) the care and housing for
individuals released from State mental health facilities; (iv) the treatment
provided at several State mental hygiene facilities; (v) contamination of the
Love Canal area of Niagara Falls; (vi) education accommodations for learning-
disabled students at a State University; (vii) alleged employment
discrimination by the State and its agencies; (viii) the State's practice of
reimbursing certain mental hygiene patient-care expenses with the client's
Social Security benefits; (ix) methods by which the State computes its aid
to localities for the administrative costs of food stamp programs; (xi)
retirement benefits payable to certain State and municipal employees; (xii)
State reimbursement of local governments for Medicaid expenditures
made for certain mentally disturbed patients; (xiii) the State's possession of
certain assets taken pursuant to the State's Abandoned Property Law; (xiv)
alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; and (xv) liability
for maintenance of erosion barriers constructed along Long Island's
shorelines.
INVESTMENT RESTRICTIONS
The Portfolios observe the following fundamental restrictions. No
Portfolio shall:
(1) Issue senior securities, except as permitted by paragraph (2)
below. For purposes of this restriction, financial futures contracts and
repurchase agreements entered into in accordance with a Portfolio's
investment policy are not deemed to be senior securities.
(2) Borrow money, except from banks as a temporary measure for extraordinary
emergency purposes in amounts not to exceed 5% of the Portfolio's total
assets (including the amount borrowed) taken at market value. The
Portfolio will not leverage to attempt to increase income. The
Portfolio will not purchase securities while borrowings are outstanding.
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(3) Pledge, mortgage or hypothecate its assets, except to secure indebtedness
permitted by paragraph (2) above and then only if such pledging,
mortgaging or hypothecating does not exceed 10% of the Portfolio's total
assets taken at market value. (The Portfolios have no present intention
of engaging in transactions permitted under this paragraph (3).)
(4) Act as an underwriter, except to the extent that in connection
with the disposition of portfolio securities, the Portfolio may be deemed
to be an underwriter for purpose of the Securities Act of 1933. A Portfolio
may also participate as part of a group in bidding for the purchase of
Tax-Exempt Bonds directly from an issuer in order to take advantage of the
lower purchase price available to members of such groups.
(5) Purchase or sell real estate or any interest therein, but this
restriction shall not prevent a Portfolio from investing in Tax-Exempt Bonds
secured by real estate or interests therein.
(6) Make loans, except for the purchase of a portion of an issue of
Tax-Exempt Bonds or short-term taxable investment, whether or not the
purchase is made upon the original issuance of such securities, and
repurchase agreements entered into in accord with a Portfolio's investment
policy.
(7) Except as permitted by paragraph (4) above, participate in a joint or
joint-and-several basis in any securities trading account. The
"bunching" of orders for the sale or purchase of marketable portfolio
securities with other accounts under the management of the Adviser to
save commissions or to average prices among them is not deemed to result in
a joint securities trading account.
(8) Buy or sell commodity contracts, except financial futures
contracts as described in the Prospectus under the caption "Investment
Objective and Policies."
(9) Purchase securities on margin (except that it may obtain such
short-term credits as may be necessary for the clearance of purchase or
sales of securities and may make margin payments in connection with
transactions in financial futures) or make short sales of securities.
(10) Purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after such purchase,
the value of its investments in such industry would exceed 25% of
its total assets taken at market value at the time of each investment.
(Tax-Exempt Bonds and securities issued or guaranteed by the United States
Government and its agencies and instrumentalities are not subject to this
limitation.)
(11) Purchase securities of an issuer (other than the U.S.
Government, its agencies or instrumentalities), if
(a) such purchase would cause more than 10 percent of the outstanding
voting securities of such issuer to be held by the Fund; or
(b) to the Portfolio's knowledge, one or more of the Trustees or
officers of the Fund or directors or officers of the Adviser or any
investment management subsidiary of the Adviser individually owns beneficially
more than 0.5 percent and together own beneficially more than 5
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percent of the securities of such issuer, nor will the Portfolio hold the
securities of any such issuer. For the purposes of this paragraph (11),
each government unit (state, county, city, for example) and each
subdivision, agency or instrumentality thereof, and each multimember agency of
which any of them is a member, shall be considered a separate issuer.
(12) Invest in securities of another registered investment company.
(13) Except for investments which, in the aggregate, taken at cost do not
exceed 5 percent of the Portfolio's total assets taken at market value,
purchase securities unless the issuer thereof has a record of at least 3
years' continuous operation prior to the purchase. (This limitation
does not apply to securities that are issued or guaranteed by the United
States government and its agencies or instrumentalities or are secured by
the pledge of the faith, credit, and taxing power of any entity authorized
to issue Tax-Exempt Bonds.)
(14) Purchase any security, including any repurchase agreement maturing in
more than seven days, which is subject to legal or contractual delays in or
restrictions on resale, or which is not readily marketable, if more
than 10% of the net assets of the Portfolio, taken at market value, would
be invested in such securities.
In order to permit the sale of the Portfolios in, certain states, the Trustees
may, in their sole discretion, adopt restrictions on investment policies more
restrictive than those described above. Should the Trustees determine
that a restrictive policy is no longer in the best interest of a Portfolio
and its shareholders, the Portfolio may cease offering shares in the state
involved and the Trustees may revoke the restrictive policy. Moreover; if the
states involved no longer require any such restrictive policy, the Trustees
may, at their discretion, revoke the policy.
Except as otherwise specifically noted, the investment objective, policies and
restrictions of a Portfolio described in the Prospectus and above may
not be changed without approval of a majority of the outstanding voting
securities of a Portfolio. As used in the Prospectus and this
Statement of Additional Information, such approval means the approval of the
lesser of (i) the holders of 67 percent or more of the shares represented at
the meeting if the holders of more than 50 percent of the outstanding
shares of the Portfolio are present in person or by proxy, or (ii) the
holders of more than 50 percent of the outstanding shares.
RATINGS
Moody's describes its ratings for Tax-Exempt Bonds as follows:
Bonds. "Bonds which are rated 'Aaa' are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as 'gilt edge.' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
"Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the 'Aaa' group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in 'Aaa' securities or
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fluctuation of protective elements may be of grater amplitude or there
may be other elements present which make the long term risks appear
somewhat larger than in 'Aaa' securities.
"Bonds which are rated 'A' possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
"Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
"Bonds which are rated 'Ba' are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future.
Uncertainty of position, characterizes bonds in this class.
"Bonds which are rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
"Bonds which are rated 'Caa' are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
"Bonds which are rated 'CA' represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
"Bonds which are rated 'C' are the lowest rated classes of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
obtaining any real investment standing."
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
(i) an application for rating was not received or accepted; (ii) the issue or
issuer belongs to a group of securities that are not rated as a matter of
policy; (iii) there is a lack of essential data pertaining to the issue or
issuer; or (iv) the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is
no longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
Standard & Poor's describes its ratings for Tax-Exempt Bonds as follows:
"AAA. Debt rated 'AAA' has the highest rating by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
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"AA. Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
"A. Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
"BBB. Debt rated 'BBB' is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories."
Debt rated "BB," "B," "CCC," or "CC" is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and pay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major risk exposures to adverse
conditions.
UNRATED. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Fitch describes its rating for Tax-Exempt Bonds as follows:
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA. Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA". Because bonds
rated in the "AAA" and the 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated 'F-1+'.
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB. Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB. Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt service
requirements.
29
<PAGE> 151
NOTES. Ratings for state and municipal notes and other short- term
obligations will be designated Moody's Investment Grade ("MIG"). This
distinction is in recognition of the differences between short-term credit
risk and long-term risk. Factors affecting the liquidity of the
borrower are uppermost in importance in short-term borrowing, while various
factors of the first importance on bond risk are of lesser importance in
the short run. Symbols will be used as follows:
"MIG-1 Notes bearing this designation are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
"MIG-2 Notes bearing this designation are of high quality with margins of
protection ample although not so large as in the preceding group."
COMMERCIAL PAPER. As described in the Prospectus, the Fund may invest in
commercial paper which is rated A-1 or A-2 by Standard & Poor's, P-1 or P-2
by Moody's or F-1+ or f1 by Fitch.
Moody's ratings for commercial paper are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity
in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
"P-1 -- "Prime-1" indicates the highest quality repayment
capacity of the rated issues.
"P-2 -- "Prime-2" indicates that the issuer has a strong capacity for
repayment of short-term promissory obligations. Earnings trends and
coverage ratios, while sound, will be more subjective to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained."
Standard & Poor's commercial paper ratings are current assessments
of the likelihood of timely payment of debts having an original maturity of
no more than 365 days. Standard & Poor's two highest commercial paper rating
categories are as follows:
"A-1 -- This designation indicates that the degree of safety
regarding timely payment is very strong. Those issues determined to possess
overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
"A-2 -- Capacity for timely payment on issues with this
designation is strong. However, the relative degree of safety is not as high
as for issues designated A-1."
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium notes, and
municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in
a timely manner.
Fitch's short-term ratings are as follows:
30
<PAGE> 152
F-1+ Exceptionally strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+"
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers who
are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and
Trustees of the Fund are also officers and directors of the Fund's
investment adviser, John Hancock Advisers, Inc. (the "Adviser"), or
directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
The following table sets forth the principal occupation or employment
of the Trustees and principal officers of the Fund during the past five
years.
31
<PAGE> 153
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ---------------- ------------- --------------------------
<S> <C> <S>
*Edward J. Boudreau, Jr. Chairman (1,2) Chairman and Chief
101 Huntington Avenue Executive Officer, the
Boston, Massachusetts Adviser and The Berkeley
Financial Group ("The
Berkeley Group");
Chairman, NM Capital
Management, Inc. ("NM
Capital"); John Hancock
Advisers International
Limited; ("Advisers
International"); John
Hancock Funds, Inc.,
("John Hancock Funds");
John Hancock Investor
Services Corporation
("Investor Services") and
Sovereign Asset
Management Corporation
("SAMCorp"); (hereinafter
the Adviser, The Berkeley
Group, NM Capital,
Advisers International,
John Hancock Funds,
Investor Services and
SAMCorp are collectively
referred to as the
"Affiliated Companies");
Chairman, First Signature
Bank & Trust; Director,
John Hancock Freedom
Securities Corp., John
Hancock Capital Corp.,
New England/Canada
Business Council; Member,
Investment Company
Institute Board of
Governors; Director, Asia
Strategic Growth Fund,
Inc.; Trustee, Museum of
Science; President, the
Adviser (until July
1992). Chairman John
Hancock Distributors,
Inc. (until April, 1994).
<FN>
- --------------
* An "interested person" of the Fund, as such term is defined in
the Investment Company Act of 1940, as amended (the "Investment
Company Act:).
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
</TABLE>
32
<PAGE> 154
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ---------------- --------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee (4) Professor of Law, Boston
Boston University University School of Law;
Boston, Trustee, Brookline
Massachusetts Savings Bank; Director,
Boston University Center
for Banking Law Studies
(until 1990).
Richard P. Chapman, Trustee (4) President, Brookline
Jr. Savings Bank.
160 Washington
Street
Brookline,
Massachusetts
*Francis C. Cleary, Trustee (1) Vice President and
Jr. Counsel, the Life
John Hancock Place Insurance Company,
P.O. Box 111 Director, John Hancock
Boston, Variable Life Insurance
Massachusetts Company.
William J. Cosgrove Trustee (4) Vice President, Senior
20 Buttonwood Place Banker and Senior Credit
Saddle River, New Officer, Citibank, N.A.
Jersey (retired September 1991);
Executive Vice President,
Citadel Group
Representative, Inc.
Gail D. Fosler Trustee (4) Vice President and Chief
4104 Woodbine Street Economist, The Conference
Chevy Chase, MD Board (non-profit
economic and business
research); Deputy Staff
Director and Chief
Economist, Minority Staff
of U.S. Senate Committee
on the Budget (until
September 1989).
Bayard Henry Trustee (4) Corporate Advisor;
121 High Street Director, Fiduciary Trust
Boston, Company (a trust
Massachusetts company); Director,
Groundwater Technology,
Inc. (remediation);
Samuel Cabot, Inc.;
Advisor, Corning Capital
Corp.
<FN>
- -------------------
* An "interested person" of the Fund, as such term is defined in
the Investment Company Act.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
</TABLE>
33
<PAGE> 155
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ---------------- -------------- --------------------------
<S> <C> <C>
*Richard S. Scipione Trustee (3) General Counsel, the Life
John Hancock Place Insurance Company;
P.O. Box 111 Director, the Adviser,
Boston, the Affiliated Companies,
Massachusetts John Hancock
Distributors, Inc., JH
Networking Insurance
Agency, Inc., John
Hancock Subsidiaries,
Inc., SAMCorp, NM Capital
and John Hancock Property
and Casualty Insurance
and its affiliates (until
November, 1993); Trustee;
The Berkeley Group;
Director, John Hancock
Home Mortgages Corp. and
John Hancock Financial
Access, Inc. (until July
1990).
Edward J. Spellman Trustee (4) Partner, KPMG Peat
259C Commercial Bld. Marwick (retired June
Suite 200 1990).
Lauderdale by the
Sea, FL
*Robert G. Freedman Vice Chairman Vice Chairman, Chief
101 Huntington and Chief Investment Officer, the
Avenue Investment Adviser; President, the
Boston, Officer Adviser until January
Massachusetts 1995.
*Anne C. Hodsdon President President and Chief
101 Huntington Operations Officer, the
Avenue Adviser; Executive Vice
Boston, President, the Adviser
Massachusetts until January 1995.
*Thomas H. Drohan Senior Vice Senior Vice President and
101 Huntington President and Secretary, the Adviser.
Avenue Secretary
Boston,
Massachusetts
*James K. Ho Senior Vice Senior Vice President,
101 Huntington President (2) the Adviser.
Avenue
Boston,
Massachusetts
<FN>
- ------------------
* An "interested person" of the Fund, as such term is defined in
the Investment Company Act.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
</TABLE>
34
<PAGE> 156
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ---------------- -------------- --------------------------
<S> <C> <C>
*James B. Little Senior Vice Senior Vice President
101 Huntington President and the Adviser.
Avenue Chief Financial
Boston, Officer (2)
Massachusetts
*Michael P. DiCarlo Senior Vice Senior Vice President,
101 Huntington President (2) the Adviser.
Avenue
Boston,
Massachusetts
*John A. Morin Vice President Vice President, the
101 Huntington Adviser.
Avenue
Boston,
Massachusetts
*Susan S. Newton Vice President, Vice President and
101 Huntington Assistant Assistant Secretary, the
Avenue Secretary and Adviser.
Boston, Compliance
Massachusetts Officer
*James J. Stokowski Vice President Vice President, the
101 Huntington and Treasurer Adviser.
Avenue
Boston,
Massachusetts
*Andrew F. St. Senior Vice Senior Vice President,
Pierre President (2) the Adviser; Portfolio
101 Huntington Manager, Harvard
Avenue Management Corp. (until
Boston, October, 1991).
Massachusetts
<FN>
- -------------------
* An "interested person" of the Fund, as such term is defined in
the Investment Company Act.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
</TABLE>
35
<PAGE> 157
As of the date of this Statement of Additional Information, the
officers and Trustees of the Fund as a group owned less than 1% of the
outstanding shares of each Portfolio.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be
officers and/or directors and/or Trustees of one or more of the other
funds for which the Adviser serves as investment adviser.
During the fiscal year ended August 31, 1994, the Independent Trustees'
fees for the California, Massachusetts and New York Portfolios amounted to
$4,625, $4,683, and $5,045, respectively.
INVESTMENT ADVISORY AND OTHER SERVICES
Each of the Trustees and principal officers affiliated with the Fund and the
Portfolios who is also an affiliated person of the Adviser is named above,
together with the capacity in which such person is affiliated with the Fund
and the Adviser.
As described in the Fund's Prospectus under the caption "Organization and
Management of the Fund," the Fund, on behalf of the Portfolios, has entered
into an investment management contract with the Adviser, under which the
Adviser provides each Portfolio with a continuous investment program,
consistent with the Portfolio's stated investment objective and policies.
Investors should refer to the Prospectus for a description of certain
information concerning the investment management contract of the Fund. The
Adviser is responsible for the day to day management of each Portfolio's
assets.
Securities held by a Portfolio may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Securities may be held by, or be appropriate investments for, a
Portfolio as well as such other clients or funds. Because of different
investment objectives or other factors, a particular security may be bought for
one or more funds or clients when one or more are selling the same security.
If opportunities for purchase or sale of securities by the Adviser for a
Portfolio or for other funds or clients for which the Adviser renders
investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or
its affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
No person other than the Adviser and its directors and employees regularly
furnishes advice to the Fund with respect to the desirability of the
Fund's investing in, purchasing or selling securities. The Adviser may from
time to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life
Insurance Company and its affiliates.
Under the terms of the investment management contract with the Fund, the
Adviser provides the Fund with office space, supplies and other facilities
required for the business of the Fund. The Adviser pays the compensation of all
officers and employees of the Fund, and pays the expenses of clerical services
relating to the administration of the Fund.
36
<PAGE> 158
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Fund (including fees of Trustees of the Fund
who are not "interested persons," as such term is defined in the
Investment Company Act but excluding certain distribution related activities
required to be paid for by the Adviser or John Hancock Funds), and the
continuous public offering of the shares of the Fund are borne by the Fund on
behalf of each of the Portfolios.
<TABLE>
As discussed in the Prospectus and as provided by the investment
management contract, the Fund pays the Adviser monthly an investment management
fee, which is accrued daily, based on a stated percentage of the average daily
net assets of each Portfolio as follows:
<CAPTION>
<S> <C>
NET ASSET VALUE ANNUAL RATE
--------------- -----------
First $250,000,000 0.500%
Next $250,000,000 0.450%
Next $500,000,000 0.425%
Next $250,000,000 0.400%
Amount over 0.300%
$1,250,000,000
</TABLE>
From time to time, the Adviser may reduce its fee or make other arrangements
to limit a Portfolio's expenses to a specified percentage of its
average daily net assets. The Adviser retains the right to re-impose a fee
and recover any other payments to the extent that, at the end of any fiscal
year, the Portfolio's annual expenses fall below this limit.
On August 31, 1994, the net assets of the California, Massachusetts
and New York Portfolios were $49,041,630, $54,122,437, and
$55,690,298, respectively. For the years ended August 31, 1992, 1993 and
1994, as a result of the expense limitations described in the Prospectus,
the Adviser did not receive a fee from any Portfolio.
If the total of all ordinary business expenses of any Portfolio for any
fiscal year exceeds the limitations prescribed in any state in which shares
of the Portfolio are registered for sale, the fee payable to the Adviser will
be reduced to the extent of such excess and the Adviser will make any
additional arrangements necessary to eliminate any remaining excess expenses.
At this time, the only State imposed restrictive limits on expenses applicable
to the Fund is that of California. The California regulation requires that
expenses charged to the California Portfolio in any fiscal year not exceed 2.5%
of the first $30,000,000 of the Portfolio's average daily net assets, 2% of the
next $70,000,000 of the Portfolio's average daily net assets, and 1.5% of the
remaining average daily net assets. When calculating this limit, the
California Portfolio may exclude interest, brokerage commissions and
extraordinary expenses.
Pursuant to its investment management contract, the Adviser is not liable to
the Fund or its shareholders for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which the
contract relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of its obligations and duties under
the management contract.
37
<PAGE> 159
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and currently has approximately $10 billion
in assets under management in its capacity as investment adviser to the Fund
and the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 900,000 shareholders.
The Adviser is an affiliate of the Life Insurance Company, one of the most
recognized and respected financial institutions in the nation. With total
assets under management of $80 billion, the Life Insurance Company is one of
the 10 largest life insurance companies in the United States, and carries
Standard & Poor's and A.M. Best's highest ratings. Founded in 1862, the Life
Insurance Company has been serving clients for over 130 years.
Under the investment management contract, the Fund and each Portfolio may use
the name "John Hancock" or any name derived from or similar to it only for so
long as the contract or any extension, renewal or amendment thereof remains in
effect. If the contract is no longer in effect, the Fund (to the extent
that it lawfully can) will cease to use such a name or any other name
indicating that it is advised by or otherwise connected with the Adviser. In
addition, the Adviser or the Life Insurance Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
other corporation or entity, including but not limited to any investment
company of which the Life Insurance Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate
thereof shall be the investment adviser.
The investment management contract continues in effect from year to year if
approved annually by vote of a majority of the Fund's Trustees who are not
interested persons of one of the parties to the contract, cast in person at a
meeting called for the purpose of voting on such approval, and by either the
Fund's Trustees or the holders of a majority of each affected
Portfolio's outstanding voting securities. The contract automatically
terminates upon assignment and may be terminated as to any Portfolio
without penalty on 60 days' notice at the option of either party to the
contract or by vote of a majority of the outstanding voting securities of
that Portfolio.
DISTRIBUTION CONTRACT
The Fund has a distribution contract with John Hancock Funds. Under the
contract, John Hancock Funds is obligated to use its best efforts to sell
shares on behalf of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accepts orders
for the purchase of the shares of the Fund which are offered at net asset
value next determined plus the applicable sales charge. John Hancock
Funds and Selling Brokers receive compensation in the form of a sales
charge at rates which are listed in the Portfolios' Prospectus.
In addition, to compensate John Hancock Funds for the services which it
provides as distributor of shares of the Fund, effective July 1, 1993, the
Fund has amended and restated, on behalf of each of the Portfolios, the
Distribution Plan (the "Plan") initially adopted on May 5, 1987, pursuant
to Rule 12b-1 under the Investment Company Act. Under the Plan for each
Portfolio, the Fund will pay distribution and service fees at an aggregate
annual rate of 0.30% of the average daily net assets of the Portfolio,
provided that the amount of the service fee will not exceed 0.25% of such
assets. The distribution fees reimburse John Hancock Funds for its
distribution costs incurred in the promotion of sales of shares of each
Portfolio, and the service fees compensate Selling Brokers for providing
personal and account maintenance services to shareholders. The Plan was
approved by a majority of the voting securities of each Portfolio and the
Plan with all
38
<PAGE> 160
amendments was approved by a majority of the Trustees, including a majority
of the Trustees who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the Plan (the
"Independent Trustees") by votes cast in person at meetings called for the
purpose of voting on such Plan.
Pursuant to the Plan, at least quarterly, John Hancock Funds shall provide
the Fund with a written report of the amounts expended under the Plan and the
purpose for which such expenditures were made. The Trustees shall review
such reports on a quarterly basis.
During the fiscal year ended August 31, 1994, the Funds paid John Hancock
Investor Services Corporation ("Investor Services") the following amounts of
expenses on each Portfolio.
<TABLE>
<CAPTION>
EXPENSE ITEMS
-------------
Printing and
Mailing of Interest Carrying
Prospectuses Compensation or Other
Adver- to New to Selling Expense of Finance Charges
tising Shareholders Brokers Distributors Other
------ ------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
California Portfolio $13,316 $8,238 $60,054 $23,525 $0
New York Portfolio $14,949 $7,329 $68,658 $27,914 $0
Massachusetts Portfolio $13,553 $7,321 $65,296 $26,023 $0
</TABLE>
The Plan provides that it will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees
and the Independent Trustees. The Plan provides that it may be terminated as to
any Portfolio without penalty (a) by vote of a majority of the Independent
Trustees, (b) by a majority of the Portfolio's outstanding voting securities
upon 60 days' written notice to John Hancock Funds and (c) automatically in the
event of assignment. It further provides that it may not be amended to increase
the maximum amount of the fees for the services described therein without the
approval of a majority of the outstanding voting securities of the affected
Portfolio. It also provides that no material amendment to the Plan will, in any
event, be effective unless it is approved by a vote of a majority of the
Trustees and of the Independent Trustees of the Fund.
In adopting the Plan the Trustees concluded that, in their judgment, there is a
reasonable likelihood that the Plan will benefit each Portfolio's shareholders.
When the Fund seeks an Independent Trustee to fill a vacancy or as a nominee
for election by shareholders, the selection or nomination of the Independent
Trustee is, under resolutions adopted by the Trustees, committed to the
discretion of the Committee on Administration of the Trustees. The members of
the Committee on Administration are all Independent Trustees and are identified
in this Statement of Additional Information under the heading "Those
Responsible for Management."
The distribution contract continues in effect from year to year if approved
annually by vote of a majority of the Trustees who are not interested persons
of one of the parties to the contract, cast in person at a meeting called for
the purpose of voting on such approval, and by either the
39
<PAGE> 161
Trustees or the holders of a majority of the affected Portfolio's
outstanding voting securities. The distribution contract automatically
terminated upon assignment. Such contract may be terminated as to
any Portfolio without penalty on 60 days' notice at the option of either
party to the contract or by vote of a majority of the outstanding voting
securities of that Portfolio.
METHODS OF OBTAINING REDUCED SALES CHARGE
The sales charge applicable to purchases of shares of a Portfolio is described
in the Fund's Prospectus. Methods of obtaining a reduced sales charge
referred to generally in the Prospectus are described in detail below.
COMBINED PURCHASES. For each Portfolio, in calculating the sales charge
applicable to purchases made at one time, the purchases will be combined if
made by (a) an individual, his spouse and their children under the age of 21,
purchasing securities for his or their own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account, and (c)
certain groups of four or more individuals making use of salary
deductions or similar group methods of payment whose funds are combined for
the purchase of mutual fund shares. Further information about
combined purchases, including certain restrictions on combined group
purchases, is available from a Investor Services or Selling Broker's
representative.
WITHOUT SALES CHARGE. As described in the Prospectus, shares of a Portfolio
may be sold without a sales charge to John Hancock affiliates and certain
government authorities.
ACCUMULATION PRIVILEGE. Investors (including investors combining purchases)
who are already shareholders may also obtain the benefit of a reduced
sales charge by taking into account not only the amount then being invested
but also the purchase price or value of the shares already held by such
person.
COMBINATION PRIVILEGE. For each Portfolio, reduced sales charges (according to
the schedule set forth in the Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in
shares of the Portfolio and shares of all other John Hancock funds which
carry a sales charge.
LETTER OF INTENTION. For each Portfolio, the reduced sales charges are
also applicable to investments made over a specified period pursuant to a
Letter of Intention (the "LOI"), which should be read carefully
prior to its execution by an investor. Such an investment (including
accumulations and combinations) must aggregate $100,000 or more invested
during the a period of thirteen months from the date of the LOI or from a
date within ninety days prior thereto, upon written request to Investor
Services. The sales charge applicable to all amounts invested under the LOI
is computed as if the aggregate amount intended to be invested had been
invested immediately. If such aggregate amount is not actually invested,
the difference in the sales charge actually paid and the sales charge
payable had the LOI not been in effect is due from the investor. However,
for the purchases actually made within the specified period the sales
charge applicable will not be higher than that which would have applied
(including accumulations and combinations) had the LOI been for the amount
actually invested.
40
<PAGE> 162
The LOI authorizes Investor Services to hold in escrow sufficient shares
(approximately 5% of the aggregate) to make up any difference in sales charges
on the amount intended to be invested and the amount actually invested, until
such investment is completed within the specified period, at which time the
escrow shares will be released. If the total investment specified in the LOI
is not completed, the shares held in escrow may be redeemed and the proceeds
used as required to pay such sales charge as may be due. By signing the LOI,
the investor authorizes Investor Services to act as his attorney-in-fact to
redeem any escrowed shares and adjust the sales charge, if necessary. An LOI
does not constitute a binding commitment by an investor to purchase or by the
Fund to sell any additional shares and may be terminated at any time.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of each Portfolio in whole or in part in portfolio
securities as prescribed by the Trustees of the Fund. When the shareholder
sells portfolio securities received in this fashion he would incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, the Fund must redeem its shares for cash except to the
extent that the redemption payments to any one shareholder during any 90-day
period would exceed the lesser of $250,000 or 1% of the Fund's net asset
value at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
SYSTEMATIC WITHDRAWAL PLAN. As described briefly in the Fund's Prospectus,
each of the Portfolios permits the establishment of a Systematic Withdrawal
Plan. Payments under this plan represent proceeds arising from the redemption
of a Portfolio's shares. Since the redemption price of the shares of a
Portfolio may be more or less than the shareholder's cost, depending upon the
market value of the securities owned by the Portfolio at the time of
redemption, the distribution of cash pursuant to this plan may result in
realization of gain or loss for purposes of Federal, state and local income
taxes. The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional shares of the Portfolio could be disadvantageous to a
shareholder because of the sales charge payable on such purchases and because
redemptions are taxable events. Therefore, a shareholder should not purchase
Portfolio shares at the same time as a Systematic Withdrawal Plan is in effect.
The Fund reserves the right to modify or discontinue the Systematic Withdrawal
Plan of any shareholder on 30 days' prior written notice to such shareholder,
or to discontinue the availability of such plan in the future. The shareholder
may terminate the plan at any time by giving proper notice to Investor
Services.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP). This program is explained in
the Prospectus. The program, as it relates to automatic investment checks,
is subject to the following conditions:
The investment will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic Accumulation
Program may be revoked by Investor Services without prior notice if any check
is not honored by your bank. The bank shall be under no obligation to notify
you as to the non-payment of any check.
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The Program may be discontinued by the shareholder either by calling Investor
Services or upon written notice to Investor Services which is received at least
five (5) business days prior to the due date of any investment.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed shares of a Portfolio
may, within 120 days after the date of redemption, reinvest without payment of
a sales charge any part of the redemption proceeds in shares of that Portfolio
or in shares of any of the other John Hancock mutual funds, subject to the
minimum investment limit in any fund. Each of the Portfolios may modify or
terminate the reinvestment privilege at any time.
No sales charge will apply to shares of the Fund reinvested in any of the other
John Hancock funds which are otherwise subject to a sales charge. If a CDSC
was paid upon a redemption, you may reinvest in the same class of shares from
which the redemption was made within 120 days at net asset value, receive a
reinstatement of the CDSC previously charged and reinvested shares will
continue to be subject to the CDSC. For the purpose of calculating the CDSC,
the holding period of the shares acquired through reinvestment will
include the holding period of the redeemed shares.
A redemption or exchange of Portfolio shares is a taxable transaction for
Federal income tax purposes. Any gain realized is recognized for such
purposes even if the reinvestment privilege is exercised, and any loss realized
by a shareholder on the redemption or other disposition of Fund shares
will be treated as described under the heading "Tax Status."
TAX STATUS
Each Portfolio is treated as a separate entity for accounting and tax purposes,
qualified as a "regulated investment company" under Subchapter M of the
Internal Revenue Code (the "Code") for its taxable year ended August 31, 1994
and intends to so qualify in the future. As such and by complying with the
applicable provisions of the Code regarding the sources of its income, the
timing of its distributions, and the diversification of its assets, each
Portfolio will not be subject to Federal income tax on taxable income
(including gain from the disposition of portfolio securities or the right to
when-issued securities prior to issuance or the lapse, exercise, delivery under
or closing out of options and financial futures contracts, income from
repurchase agreements and other taxable securities, income attributable to
accrued market discount, and a portion of the discount from certain stripped
tax-exempt obligations or their coupons) which is distributed to shareholders
at least annually.
Distributions of net investment income (which includes accrued original issue
discount and accrued, recognized market discount) and any net realized capital
gains, as computed for Federal income tax purposes, will be treated as
described in the Prospectus whether made in shares or in cash. Shareholders
electing to receive distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each share so received equal to
the amount of cash which could have been received had they taken the
distribution in cash.
Distributions of tax-exempt interest ("exempt-interest dividends") timely
designated as such by a Portfolio to its shareholders will be treated as
tax-exempt interest under the Code, provided that the Portfolio qualifies as a
regulated investment company and at least 50% of the value of its
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rassets at the end of each quarter of its taxable year is invested in
tax-exempt obligations. Shareholders are required to report their receipt of
tax-exempt interest, including such distributions, on their Federal income
tax returns.
Interest income from certain types of tax-exempt bonds that are private
activity bonds in which the Portfolios may invest is treated as an item of tax
preference for purposes of the Federal alternative minimum tax. To the extent
that a Portfolio invests in these tax-exempt bonds, shareholders will be
required to treat as an item of tax preference for Federal alternative minimum
purposes that part of the Portfolio's exempt-interest dividends which is
derived from interest on these tax-exempt bonds. Exempt-interest dividends
derived from interest income from all tax-exempt bonds are included in
corporate "adjusted current earnings" for purposes of computing the alternative
minimum tax liability, if any, of corporate shareholders of each
Portfolio.
The amount of realized capital gains, if any, in any given year will vary
depending upon the Adviser's current investment strategy and whether the
Adviser believes it to be in the best interest of the Portfolio to dispose of
portfolio securities and/or engage in options or futures transactions that
will generate capital gains. Since, at the time of an investor's purchase of a
Portfolio's shares, a portion of the per share net asset value by which the
purchase price is determined may be represented by realized or unrealized
appreciation in the Portfolio's holdings or undistributed taxable income of
the Portfolio, subsequent distributions of amounts other than tax-exempt
interest income (or portions thereof) on such shares may be taxable to such
investor even if the net asset value of his shares is, as a result of the
distributions, reduced below his cost for such shares, and the distributions
(or portions thereof) in reality represent a return of a portion of the
purchase price.
Upon a redemption of shares (including by exercise of the exchange privilege)
a shareholder will ordinarily realize a taxable gain or loss depending upon his
basis in his shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's holding period for
the shares. A sales charge paid in purchasing shares of a Portfolio cannot be
taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
shares of the Portfolio or another John Hancock fund are subsequently acquired
without payment of a sales charge pursuant to the reinvestment or exchange
privilege. Such charge will result in an increase in the shareholder's tax
basis in the shares subsequently acquired. Also, any loss realized on a
redemption or exchange will be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as may occur when dividends are
reinvested. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares and will be disallowed to
the extent of any exempt-interest dividends received with respect to such
shares.
Although its present intention is to distribute all net realized capital
gains, if any, each Portfolio reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. A
Portfolio will not, in any event, distribute net long-term capital gain
realized in any year to the extent that a capital loss is carried forward
from prior years against such gain. To the extent such
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excess was retained and not exhausted by the carry forward of prior year
capital losses, it would be subject to federal income tax in the hands of the
Portfolio. Each shareholder would be treated for federal income tax purposes as
if the Portfolio had distributed to him on the last day of its taxable year his
pro rata share of such excess, and he had paid his pro rata share of the taxes
paid by the Portfolio and reinvested the remainder in the Portfolio.
Accordingly, each shareholder would (a) include his pro rata share of such
excess as long-term capital gain income in his return for his taxable year in
which the last day of the Portfolio's taxable year falls, (b) be entitled
either to a tax credit on his return for, or to a refund of, his pro rata share
of the taxes paid by the Portfolio and (c) be entitled to increase the
adjusted tax basis for his shares in a Portfolio by the difference between his
pro rata share of each excess and his pro rata share of such taxes.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of a Portfolio will not be deductible for Federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by such
Portfolio. Pursuant to published guidelines, the Internal Revenue Service may
deem indebtedness to have been incurred for the purpose of purchasing or
carrying shares of a Portfolio even though the borrowed funds may not be
directly traceable to the purchase of shares.
For Federal income tax purposes, each of the Portfolios is permitted to carry
forward a net realized capital loss in any year to offset its realized capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent net realized capital gains are offset by such losses, they
would not result in federal income tax liability to the Portfolio and, as noted
above, would not be distributed to shareholders. Presently, only the
Massachusetts Portfolio has realized capital loss carry-forwards of $2,465
expiring August 31, 2002 available to offset against future net realized
capital gains. Distributions from a Portfolio will not qualify for the
dividends-received deduction for corporations.
A Portfolio that invests in securities with original issue discount (or with
market discount if an election is made to include market discount in income
currently) must accrue income on such securities prior to the receipt of the
corresponding cash payments. Each Portfolio must distribute, at least annually,
all or substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, a Portfolio may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash to satisfy distribution requirements.
The Portfolios may invest in debt obligations that are in the lower rating
categories or are unrated, including debt obligations of issuers not currently
paying interest as well as issuers who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for
the Portfolios. Tax rules are not entirely clear about issues such as when the
Portfolios may cease to accrue interest, original issue discount, or market
discount, when and to what extent deductions may be taken for bad debts or
worthless securities, how payments received on obligations in default should
be allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Portfolios, in the event they invest in such securities, in
order to ensure that they distribute sufficient income to preserve their status
as regulated investment companies and to avoid becoming subject to Federal
income or excise tax.
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The options and futures transactions undertaken by a Portfolio produce
taxable capital gain or loss and may affect the character as long-term or
short-term of some capital gains and losses realized by the Portfolio.
Also, the Portfolio's losses on its transactions involving options and
futures contracts and related securities positions may be deferred rather
than being taken into account currently. Each Portfolio's options and
futures contracts will generally be required to be marked to market for tax
purposes as of the close of its taxable year, even if they have not been
actually disposed of, and any gain or loss recognized will generally be
treated as 60% long-term and 40% short-term capital gain or loss.
Accordingly, the special tax rules applicable to options and futures
transactions may affect the amount, timing and character of each Portfolio's
gain or loss and hence of its distributions to shareholders.
Each Portfolios will be subject to a four percent non-deductible Federal
excise tax on certain taxable amounts not distributed (and not treated as
having been distributed) on a timely basis in accordance with annual minimum
distribution requirements. Each Portfolios intends under normal circumstances
to avoid liability for such tax by satisfying such distribution requirements.
The Portfolios are not subject to Massachusetts corporate excise or franchise
taxes. Provided that each Portfolio qualifies as a regulated investment
company under the Code, it will not be required to pay any Massachusetts
income tax.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
Dividends, capital gain distributions, and ownership of or gains realized on
the exchange or redemption of Portfolio shares may also be subject to
state and local taxes. The discussion does not address special tax rules
applicable to certain types of investors, such as banks, insurance companies,
or tax-exempt entities. Shareholders should consult their own tax advisers as
to the Federal, state or local tax consequences of ownership of shares of
a Portfolio in particular circumstances.
Foreign investors not engaged in a U.S. trade or business with which their
Portfolio investment is effectively connected will be subject to U.S. Federal
income tax treatment different from that described above, including a
possible 30% U.S. withholding tax (or lower treaty rate) on dividends
representing ordinary income, and should consult their tax advisers regarding
such treatment and the application of foreign taxes to an investment in
a Portfolio.
STATE INCOME TAX INFORMATION
CALIFORNIA STATE AND LOCAL TAXES.
The following discussion assumes that the California Portfolio will be
qualified as a regulated investment company under subchapter M of the
Code and will be qualified thereunder to pay exempt interest dividends.
Individual shareholders of the California Portfolio who are subject to
California personal income taxation will not be required to include in
their California gross income that portion of their federal exempt-interest
dividends which the California Portfolio clearly and accurately
identifies as directly attributable to interest earned on obligations the
interest on which is exempt from California personal income taxation,
provided that at least 50 percent of the value of the
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California Portfolio's total assets consists of such obligations. Distributions
to individual shareholders derived from interest on municipal obligations
issued by governmental authorities in states other than California and
short-term capital gains will be taxed as dividends for purposes of California
personal income taxation. The California Portfolio's long-term capital gains
for Federal income tax purposes that are distributed to the shareholders will
be taxed as long-term capital gains to individual shareholders of the
California portfolio for purposes of California personal income taxation. Gain
or loss, if any, resulting from a sale or redemption of shares will be
recognized in the year of the sale or redemption. Present California law taxes
both long-term and short-term capital gains at the rates applicable to ordinary
income. Interest on indebtedness incurred or continued by a shareholder in
connection with the purchase of shares of the California Portfolio will not be
deductible for California personal income tax purposes.
Generally corporate shareholders of the California Portfolio subject to the
California franchise tax will be required to include any gain on a sale or
redemption of shares and all distributions of exempt interest, capital gains
and other taxable income, if any, as income subject to such tax.
The California Portfolio will not be subject to California franchise or
corporate income tax on interest income or net capital gain distributed to
the shareholders.
Shares of the California Portfolio will be exempt from local property taxes
in California.
Shares of the California Portfolio will not be excludable from the taxable
estates of deceased California resident shareholders for purposes of the
California estate and generation skipping taxes. California estate and
generation skipping taxes are creditable against the corresponding Federal
taxes.
The foregoing is a general, abbreviated summary of certain of the provisions
of California law presently in effect as it directly governs the taxation of
the shareholders of the California Portfolio. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive with respect to California Portfolio transactions. Shareholders
are advised to consult with their own tax advisers for more detailed
information concerning California tax matters.
MASSACHUSETTS TAXES
Massachusetts legislation enacted on December 9, 1994 (the "Act") substantially
changed the Massachusetts income tax treatment of capital gains realized by
persons subject to Massachusetts income taxation, effective for taxable years
beginning on or after January 1, 1996. Under the Act, long-term capital gains
from the sale of a capital asset will generally be taxed on a sliding scale at
rates ranging from 5% to 0%, with the applicable tax rate declining as the tax
holding period of the asset (beginning on the later of January 1, 1995 or the
date of actual acquisition) increases from more than one year to more than six
years. Massachusetts resident individuals, as well as estates or personal
trusts subject to Massachusetts income taxation, will be subject to this new
tax structure with respect to redemption, exchanges or other dispositions of
their shares of the Massachusetts Portfolio in their taxable years beginning
after 1995, assuming that they hold their shares of the Massachusetts Portfolio
as capital assets for purposes of the Act. The Act does not address the
Massachusetts tax treatment of dividends paid by the Massachusetts
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Portfolio that are designated and treated as long-term capital gains for
Federal income tax purposes, and it is accordingly not clear how such dividends
will be treated for Massachusetts tax purposes for taxable years
beginning after 1995.
In addition, on December 7, 1994, the Massachusetts House of Representatives
passed a bill (No. 1417) (the "Bill"), which, if it is passed by the Senate
and signed by the Governor, would remove the statutory authority for certain
"tax expenditures", generally effective as of June 30, 1995. Among the tax
expenditures that the Bill appears to remove statutory authority for (although
it is unclear in certain respects) are the tax exemption, deduction or
exclusion for (1) interest on tax-exempt obligations issued by the Commonwealth
of Massachusetts, any political subdivision thereof, or any agency or
instrumentality of either of the foregoing; (2) exempt-interest dividends paid
by a regulated investment company directly attributable to the interest it
receives from obligations described in item (1) above; (3) dividends paid by a
regulated investment company attributable to the interest it receives on
obligations of the United States exempt from state income taxation; and (4)
capital gain dividends paid by a regulated investment company to the extend
attributable to gain from the disposition of obligations described in item (1)
above that is exempt from Massachusetts taxation. It cannot be predicted
whether such legislation or similar legislation will be enacted. Prospective
investors should consult their tax advisers regarding the then-current status
of the Bill and any similar legislative proposals prior to investing in the
Massachusetts Portfolio.
NEW YORK TAXES.
New York State and New York City personal income taxes are imposed on "New York
taxable income," which is defined, in the case of New York resident
individuals, estates and trusts as "New York adjusted gross income" minus the
New York deductions and New York exemptions. "New York adjusted gross income",
in the case of a New York resident individual, estate or trust, is federal
adjusted gross income with certain modifications Because distributions that
qualify as exempt-interest dividends under IRC 852(b) (5) will be excluded
from Federal gross income and adjusted gross income, such distributions will
also be excluded from New York adjusted gross income, unless specifically
modified by New York law.
New York law requires that New York resident individuals, estates and trusts
add certain items to their federal adjusted gross income. One such modification
is the addition, to the extent not properly includible in Federal adjusted
gross income, of interest income on obligations of any state (or political
subdivision of any state) other than New York and its political subdivisions.
Distributions that are taxable under the IRC, including distributions properly
designated as capital gain dividends pursuant to IRC 852(b)(3) and
distributions derived from interest on U.S. Government obligations, will be
includible in New York adjusted gross income, as there is no provision in the
New York tax law that permits their subtraction from federal adjusted gross
income. New York tax law does not currently contain any special provisions
that would impose differing rates of tax on capital gain and ordinary income
in the hands of individual taxpayers.
Under New York tax law, New York resident individuals, estates and trusts are
subject to a minimum income tax (sometimes referred to as the "New York
alternate minimum tax") at the rate of six percent of "New York minimum taxable
income." This tax is imposed in addition to the regular personal income tax
imposed by the State of New York. For purposes of this
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minimum tax, New York minimum taxable income is, prior to certain reductions,
equal to the sum of the federal items of tax preference defined in IRC Section
57, with certain modifications and adjustments, but excludes from New York
minimum taxable income "the federal item of tax preference with respect to
tax-exempt interest". Distributions by the portfolio of exempt-interest
dividends (including any portion of such dividends derived from interest on
private activity bonds, the interest on which is a tax preference item
enumerated in IRC Section 57) thus will not be included in income subject to
the New York State or New York City minimum income tax on New York resident
individuals, estates and trusts.
Distributions that are properly designated as exempt-interest dividends under
IRC Section 852 (b) (5) made by the Portfolio to corporations, will be
included in entire net income in the computation of the New York State
franchise tax and New York City business taxes and shares of the Portfolio will
be included in investment capital for purposes of these taxes. If such
distributions increase a corporate shareholder's liability, they will also
result in an increased liability for tax surcharges. However, distributions
that are taxable under the IRC, with the possible exception of distributions
properly treated as capital gain dividends pursuant to IRC Section 852(b)
(3), may be eligible for a 50% dividend subtraction.
Under New York tax law, a portion of interest on indebtedness incurred or
continued to purchase or carry shares of an investment company paying dividends
which are exempt from the New York State and New York City personal income
taxes, such as the New York Portfolio, will not be deductible by the
investor for New York State and New York City personal income tax purposes.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of each Portfolio
shares, the Fund follows the valuation procedures outlined in the Prospectus
under the caption "Share Price." If a pricing service is unable to provide a
market quotation, quotations will be obtained from a broker. If market
quotations are not readily available for any security held by a Portfolio or if
in the opinion of the Adviser any quotation or price is not representative of
true market values, the fair value of the security may be determined in good
faith pursuant to procedures established by the Board of Trustees.
Money market securities with remaining maturity of 60 days or less at the time
of purchase are generally valued at amortized cost. Amortized cost involves
valuing securities at the Portfolio's acquisition cost as adjusted for
amortization of premium or accretion of discount rather than at their value
based on current market factors.
The Fund will not price shares of its Portfolio on the following national
holidays: New Year's Day; President's Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day and Christmas Day.
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Fund are responsible for the management and supervision of
the Portfolios. The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, without
par value, in an unlimited number of series. Each Portfolio share represents
an equal proportionate interest in the Portfolio with each other share
of that
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Portfolio. In the event of liquidation of a Portfolio, shareholders are
entitled to share pro rata in the net assets of the Fund attributable to such
series and available for the distribution to such holders. Shares have no
preemptive or conversion rights. Shares are fully paid and nonassessable by
the Fund.
The Trustees have to date authorized the issuance of three series of shares
(the California Portfolio, the Massachusetts Portfolio, and the New York
Portfolio) and have no current intention to create additional series. The
Trustees, however, may authorize the creation of additional series of shares
with such preferences, privileges, limitations and voting and dividend rights
as the Trustees may determine. The proceeds of any additional series would be
invested in separate, independently managed portfolios with distinct
investment objectives, policies and restrictions, and share purchase,
redemption and net asset valuation procedures. All consideration received by
the Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of such series) and would be subject to the liabilities
related thereto. Pursuant to the Investment Company Act, shareholders of any
additional series would normally have to approve the adoption of any management
contract or distribution plan relating to such series and any changes in the
fundamental investment policies related thereto.
The shareholders of the Fund are entitled to a full vote for each full share
held and to a fractional vote for fractional shares. The Trustees themselves
have the power to alter the number and the terms of office of the Trustees,
to lengthen their own terms, or to make their terms of unlimited duration,
subject to certain removal procedures, and appoint their own successors,
provided that at least a majority of Trustees have been elected by the
shareholders. The voting rights of shareholders are not cumulative so that
holders of more than 50% of the shares voting can, if they choose, elect all
Trustees being selected while holders of the remaining shares would be unable
to elect any Trustees.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Fund's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the
record holders of not less than 10% of the outstanding shares of the Fund.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Fund Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any Fund shareholder held
personally liable by reason of being or having been a shareholder. Liability
is therefore limited to circumstances in which the Fund itself would be unable
to meet its obligations, and the possibility of this occurrence is remote.
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CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1994, the Portfolios' annualized yield
and tax-equivalent yields at the maximum tax rates were 5.20% and 9.67%
for California, 5.26% and 9.90% for Massachusetts, and 5.24% and 9.24% for New
York respectively. The average annual total returns of the Portfolios for the 1
year and life-of-fund periods ended August 31, 1994 were respectively <5.56%>
and 7.90% for California, <5.45%> and 8.16% for Massachusetts <5.54%>% and
8.38% for New York.
Each Portfolio's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share
(which includes the full sales charge) on the last day of the period, according
to the following standard formula:
[FORMULA]
Where:
a = dividends and interest earned during the period.
b = expenses accrued during the period (net of fee reductions
and expense limitation payments, if any).
c = the average daily number of fund shares outstanding
during the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
Each Portfolio's total return is computed by finding the average annual
compounded rate of return over the 1 year and life-of-fund period that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1 year and life-of-fund periods.
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This calculation assumes the maximum sales charge of 4.5% is included in
the initial investment and also assumes that all dividends and distributions
are reinvested at net asset value on the reinvestment dates during the period.
In addition to average annual total returns, each Portfolio may quote
unaveraged or cumulative total returns reflecting the simple change in value
of an investment over a stated period. Cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments, and/or a series of redemptions, over any
time period. Total returns may be quoted with or without taking the Portfolio's
4.5% sales charge into account. Excluding the Portfolio's sales charge from a
total return calculation produces a higher total return figure.
The Portfolios may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Portfolio which is tax-exempt by
one minus a stated income tax rate and adding the product to that portion, if
any, of the yield of the Portfolio that is not tax-exempt.
From time to time, in reports and promotional literature, a Portfolio's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed Income
Fund Performance Analysis," a monthly publication which tracks net assets,
total return, and yield on approximately 1,700 fixed income mutual funds in
the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers
are also used for comparison purposes as well as the Russell and Wilshire
Indices. Comparisons may also be made to bank certificates of deposit, ("CDs")
which differ from mutual funds, such as a Portfolio, in several ways. The
interest rate established by the sponsoring bank is fixed for the term of a CD,
there are penalties for early withdrawal from CDs, and the principal on a CD is
insured.
Performance rankings and ratings reported periodically in national financial
publications such as Money Magazine, Forbes, Business Week, The Wall Street
Journal, Micropal, Inc., Morningstar, Stanger's, Barron's, etc., as well
as Lipper, will also be utilized.
The performance of a Portfolio is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of a
Portfolio for any period in the future. The performance of a Portfolio is a
function of many factors including its earnings, expenses and number of
outstanding shares. Fluctuating market conditions; purchases, sales and
maturities of portfolio securities; sales and redemptions of shares of
beneficial interest; and changes in operating expenses are all examples of
items that can increase or decrease the Portfolio's performance.
BROKERAGE ALLOCATION
For each Portfolio decisions concerning the purchase and sale of securities
held by the Portfolio and the allocation of brokerage commissions are made by
the officers of the Fund pursuant to recommendations made by an investment
committee of the Adviser, which consists of officers and directors of the
Adviser and affiliates, and officers and Trustees who are interested persons of
the Fund. For each Portfolio, orders for purchases and sales of securities are
placed in a manner which, in the opinion of the officers of the Fund, will
offer the best price and market for the execution of each such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commission paid by the issuer and transactions with dealers serving as
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market maker reflect a "spread." Debt securities are generally traded on a
net basis through dealers acting for their own account as principals and not as
brokers; no brokerage commissions are payable on such transactions.
The primary policy of each Portfolio is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing
primary policy, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of a Portfolio as a factor in the
selection of broker-dealers to execute the Portfolios' portfolio transactions.
To the extent consistent with the foregoing, the Portfolios will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research
information and to a lesser extent statistical assistance furnished to the
Adviser of the Portfolios, and their value and expected contribution to the
performance of the Portfolios. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Adviser. The receipt of
research information is not expected to reduce significantly the expenses of
the Adviser. The research information and statistical assistance furnished by
brokers and dealers may benefit the Life Insurance Company or other advisory
clients of the Adviser, and, conversely, brokerage commissions and spreads
paid by other advisory clients of the Adviser may result in research
information and statistical assistance beneficial to the Fund. The Portfolios
will make no commitment to allocate portfolio transactions upon any prescribed
basis. While the Fund's officers will be primarily responsible for the
allocation of the Fund's brokerage business, the policies in this regard must
be consistent with the foregoing and will at all times be subject to review by
the Trustees. For the years ended on August 31, 1992, 1993 and 1994 the Fund
paid no brokerage commissions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Portfolios may pay to a broker which provides brokerage and research services
to the Portfolios an amount of disclosed commission in excess of the commission
which another broker would have charged for effecting that transaction. This
practice is subject to a good faith determination by the Trustees that such
price is reasonable in light of the services provided and to such policies as
the Trustees may adopt from time to time. During the fiscal year ended August
31, 1994, the Fund did not pay commissions as compensation to any brokers for
research services such as industry, economic and company reviews and
evaluations of securities.
The Adviser's indirect parent, the Life Insurance Company, is the indirect
sole shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, two of which, Tucker Anthony Incorporated and Sutro &
Company, Inc., are broker-dealers ("Affiliated Brokers"). Pursuant to
procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through Affiliated Brokers. During the year ending August 31, 1994, no
Portfolio executed any portfolio transactions with Affiliated Brokers.
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Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the Investment
Company Act. Commissions paid to an Affiliated Broker must be at least as
favorable as those which the Trustee believe to be contemporaneously charged by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold. A transaction would not be placed with an
Affiliated Broker if the Fund would have to pay a commission rate less
favorable than the Affiliated Broker's contemporaneous charges for comparable
transactions for its other most favored, but unaffiliated, customers except for
accounts for which the Affiliated Broker acts as clearing broker and comparable
to the Fund as determined by a majority of the Trustees who are not interested
persons (as defined in the Investment Company Act) of the Fund, the Adviser or
the Affiliated Broker. Because the Adviser, which is affiliated with the
Affiliated Brokers, has, as an investment adviser to the Fund, the obligation
to provide investment management services, which includes elements of research
and related investment skills, such research and related skills will not be
used by the Affiliated Brokers as a basis for negotiating commission at a rate
higher than that determined in accordance with the above criteria.
TRANSFER AGENT SERVICES
Investor Services, P.O. Box 9116, Boston, MA 02205-9116, a wholly-owned
indirect subsidiary of the Life Insurance Co., is the transfer and dividend
paying agent for the Fund. The Fund pays Investor Services an annual fee of
$19.00 per shareholder account.
CUSTODY OF PORTFOLIO
Portfolio securities of the Portfolio are held pursuant to a custodian
agreement between the Fund and Investors Bank & Trust Company, 24 Federal
Street, Boston, MA 02110. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and Fund accounting services.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Fund are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts 02110. Price Waterhouse LLP audits and
renders an opinion on the Fund's annual financial statements and reviews each
Portfolio's annual Federal income tax return.
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Exhibit B
---------
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
This Statement of Additional Information is not a Prospectus, but is
intended to provide additional information regarding the activities and
operations of the John Hancock California Tax-Free Income Fund (the "Fund") and
should be read in conjunction with the Prospectus.
A Prospectus for the Fund, dated May 1, 1995, which provides the basic
information an investor should know before investing may be obtained without
charge from:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-5291
1-800-225-5291
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . 2
Certain Investment Practices . . . . . . . . . . . . . . . . . . . . . . 11
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . 15
Those Responsible for Management . . . . . . . . . . . . . . . . . . . . 17
Investment Advisory and other Services . . . . . . . . . . . . . . . . . 22
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Distribution Contract . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Redemption and Repurchase of Shares . . . . . . . . . . . . . . . . . . . 31
Additional Services and Programs . . . . . . . . . . . . . . . . . . . . 31
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Brokerage Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Transfer Agent Services . . . . . . . . . . . . . . . . . . . . . . . . . 39
Custody of Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . 39
Calculation of Performance . . . . . . . . . . . . . . . . . . . . . . . 41
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
Prior to December 22, 1994, the Fund was called Transamerica
California Tax-Free Income Fund.
INVESTMENT OBJECTIVE. As discussed under "Investment Objective and
Policies" in the Prospectus, the investment objective of the Fund is to provide
as high a level of current income exempt from both federal income taxes and
California personal income taxes, as is consistent with preservation of
capital. The Fund seeks to achieve its objective by investing primarily in
debt obligations issued by or on behalf of the state of California and its
political subdivisions, agencies and instrumentalities and other obligations
the interest on which is excluded from gross income for federal income tax
purposes and exempt from California personal income taxes ("California Tax
Exempt Securities") which are rated within the four highest ratings assigned by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch"); if unrated, are determined
to be of comparable quality by the Investment Adviser. Securities in which the
Fund may invest may not earn as high a level of current income as lower quality
securities which have greater market risk and more fluctuation in market value.
DESCRIPTION OF TAX-EXEMPT SECURITIES. As described under "Investment
Objective and Policies" in the Prospectus, in seeking to achieve its investment
objective, the Fund invests in a variety of Tax-Exempt Securities.
Municipal Bonds. Municipal bonds at the time of issuance are
generally long-term securities with maturities of as much as twenty years or
more but may have remaining maturities of shorter duration at the time of
purchase by the Fund. Municipal bonds are issued to obtain funds for various
public purposes including the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public purposes for
which Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and obtaining funds to lend to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities
to obtain funds for many types of local, privately operated facilities. Such
debt instruments are considered municipal obligations if the interest paid on
them is excluded from gross income for federal income tax purposes.
Municipal Notes. Municipal Notes are short-term obligations of
municipalities, generally with a maturity ranging from six months to three
years. The principal types of such Notes include tax, bond and revenue
anticipation notes and project notes.
Municipal Commercial Paper. Municipal Commercial Paper is a
short-term obligation of a municipality, generally issued at a discount with a
maturity of less than one year. Such paper is likely to be issued to meet
seasonal working capital needs of a municipality or interim construction
financing. Municipal Commercial Paper is backed in many cases by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks and other institutions. The yields of Municipal
Bonds depend upon, among other things, general money market conditions, general
conditions of the Municipal Bond market, size of a particular offering, the
maturity of the obligation and rating of the issue.
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VARIABLE OR FLOATING RATE OBLIGATIONS. As discussed under "Investment
Objective and Policies" in the Prospectus, certain of the obligations in which
the Fund may invest may be variable or floating rate obligations on which the
interest rate is adjusted at predesignated periodic intervals (variable rate)
or when there is a change in the market rate of interest on which the interest
rate payable on the obligation is met is based (floating rate). Variable or
floating rate obligations may include a demand feature which entitles the
purchaser to demand prepayment of the principal amount prior to stated
maturity. Also, the issuer may have a corresponding right to prepay the
principal amount prior to maturity. As with any other type of debt security,
the marketability of variable or floating rate instruments may vary depending
upon a number of factors, including the type of issuer and the terms of the
instruments. The Fund may also invest in more recently developed floating rate
instruments which are created by dividing a municipal security's interest rate
into two or more different components. Typically, one component ("floating
rate component" or "FRC") pays an interest rate that is reset periodically
through an auction process or by reference to an interest rate index. A second
component ("inverse floating rate component" or "IFRC") pays an interest rate
that varies inversely with changes to market rates of interest, because the
interest paid to the IFRC holders is generally determined by subtracting a
variable or floating rate from a predetermined amount (i.e., the difference
between the total interest paid by the municipal security and that paid by the
FRC). The Fund may purchase FRC's without limitation. Up to 10% of the Fund's
total assets may be invested in IFRC's in an attempt to protect against a
reduction in the income earned on the Fund's other investments due to a decline
in interest rates. The extent of increases and decreases in the value of an
IFRC generally will be greater than comparable changes in the value of an equal
principal amount of a fixed-rate municipal security having similar credit
quality, redemption provisions and maturity. To the extent that such
instruments are not readily marketable, as determined by the Investment
Adviser pursuant to guidelines adopted by the Board of Trustees, they will be
considered illiquid for purposes of the Fund's 10% investment restriction on
investment in non-readily marketable securities.
PARTICIPATION INTERESTS. The Fund may purchase from financial
institutions tax exempt participation interests in tax exempt securities. A
participation interest gives the Fund an undivided interest in the tax exempt
security in the proportion that the Fund's participation interest bears to the
total amount of the tax exempt security. For certain participation interests,
the Fund will have the right to demand payment, on a specified number of days'
notice, for all or any part of the Fund's participation interest in the tax
exempt security plus accrued interest. Participation interests that are
determined to be not readily marketable will be considered as such for purposes
of the Fund's 10% investment restriction on investment in non-readily
marketable illiquid securities. The Fund may also invest in Certificates of
Participation (COP's) which provide participation interests in lease revenues.
Each Certificate represents a proportionate interest in or right to the
lease-purchase payment made under municipal lease obligations or installment
sales contracts. Typically, municipal lease obligations are issued by a state
or municipal financing authority to provide funds for the construction of
facilities (e.g., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority.
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Certain municipal lease obligations may trade infrequently. Participation
interests in municipal lease obligations will not be considered illiquid for
purposes of the Fund's 10% limitation on illiquid securities provided the
Investment Adviser determines that there is a readily available market for such
securities. In reaching liquidity decisions, the Investment Adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer.) With respect to municipal lease obligations, the Investment
Adviser also considers: (1) the willingness of the municipality to continue,
annually or biannually, to appropriate funds for payment of the lease; (2) the
general credit quality of the municipality and the essentiality to the
municipality of the property covered by the lease; (3) an analysis of factors
similar to that performed by nationally recognized statistical rating
organizations in evaluating the credit quality of a municipal lease obligation,
including (i) whether the lease can be cancelled; (ii) if applicable, what
assurance there is that the assets represented by the lease can be sold; (iii)
the strength of the lessee's general credit (e.g., its debt, administrative,
economic and financial characteristics); (iv) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an event of nonappropriation); and (v)
the legal recourse in the event of failure to appropriate; and (4) any other
factors unique to municipal lease obligations as determined by the Investment
Adviser.
CALLABLE BONDS. The Fund may purchase and hold callable municipal
bonds which contain a provision in the indenture permitting the issuer to
redeem the bonds prior to their maturity dates at a specified price which
typically reflects a premium over the bonds' original issue price. These bonds
generally have call-protection (a period of time during which the bonds may not
be called) which usually lasts for 7 to 10 years, after which time such bonds
may be called away. An issuer may generally be expected to call its bonds, or
a portion of them during periods of relatively declining interest rates, when
borrowings may be replaced at lower rates than those obtained in prior years.
If the proceeds of a bond called under such circumstances are reinvested, the
result may be a lower overall yield due to lower current interest rates. If the
purchase price of such bonds included a premium related to the appreciated
value of the bonds, some or all of that premium may not be recovered by
bondholders, such as the Fund, depending on the price at which such bonds were
redeemed.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA TAX-EXEMPT SECURITIES.
Since the Fund concentrates its investments in California Tax-Exempt
Securities, the Fund will be affected by any political, economic or regulatory
developments affecting the ability of California issuers to pay interest or
repay principal.
GENERAL. From mid-1990 until late 1993, California has endured a
prolonged economic recession coupled with deteriorating fiscal and budget
conditions. During this period, the state has also contended with natural
disasters including fires, a prolonged drought and a major earthquake in the
Los Angeles area (January 1994), rapidly growing population, and increasing
social service requirements. Unlike the early 1980's the diverse California
economy has not yet staged a major rebound to quickly carry the State out of
this downturn.
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The California economy has begun to show encouraging signs of growth
since the start of 1994. After two years of unemployment rates over 9%,
ongoing job losses and company relocation's out-of-state, California has begun
to register net job growth. Sectors exhibiting employment growth have been the
construction and related manufacturing, wholesale, and retail trade industries,
transportation, and recreation, business, and management consulting services.
This growth has offset the slowing losses in the aerospace industry and
restructuring of the finance and utility sectors. Over the next two years,
nonfarm employment is projected to remain stable in 1994 but expand by 6.1% in
1995. These trends are expected to continue and allow the State's recovery to
gain momentum over the next two years.
The prolonged recession has seriously impacted California tax revenues
and produced the need for additional expenditures on health and welfare
services. Since the late 1980's, the State's Administrations have recognized
that its budget problems stem in part from a structural imbalance. The largest
General Fund programs - K-12 schools and community colleges, health and
welfare, and corrections - have been increasing faster than the revenue base,
driven by the State's rapid population growth. General Fund expenditures
exceeded revenues for four of the five fiscal years ended 1991-92. These
structural concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
The principal sources of the State's General Fund revenues are the
California personal income tax (44% of total revenues) sales and use tax (35%)
and bank and corporation taxes (12%). The State maintains a Special Fund for
Economic Uncertainties (the "SFEU") derived from General Fund revenues as a
reserve to meet cash needs of the General Fund but which is required to be
replenished as soon as sufficient revenues are available. Because of the
recession, the SFEU has had a negative balance since 1991; the Administration
projects a positive balance of about $92 million in the SFEU by June 30, 1996.
RECENT BUDGETS. The State failed to enact its 1992-93 budget by July
1, 1992. Although the State had no legal authority to pay many of its vendors,
certain obligations (such as debt service, school apportionments, welfare
payments, and employee salaries) were payable because of continuing or special
appropriations, or court orders. However, the State Controller did not have
enough cash to pay as they came due all of these ongoing obligations, as well
as valid obligations incurred in the prior fiscal year. Starting on July 1,
1992, the Controller was required to issue "registered warrants' in lieu of
normal warrants backed by cash to pay many State obligations. Available cash
was used to pay constitutionally mandated and priority obligations. Between
July 1 and September 3, 1992, the Controller issued an aggregate of
approximately $3.8 billion of registered warrants all of which were called for
redemption by September 4, 1992 following enactment of the 1992-93 Budget Act
and issuance by the State of short- term notes.
The 1992-93 Budget Act, when finally adopted, was projected to
eliminate the State's accumulated deficit, with additional expenditure cuts and
a $1.3 billion transfer of State
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education funding costs to local governments by shifting local property taxes
to school districts. However, as the recession continued longer and deeper
than expected, revenues once again were far below projections, and only reached
a level just equal to the amount of expenditures, so the State continued to
carry its $2.8 billion budget deficit as of June 30, 1993.
The 1993-94 Budget Act was similar to the prior year, in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a
two-year plan to eliminate the accumulated deficit by borrowing into the
1994-95 fiscal year. With the recession still continuing longer than expected,
the General Fund had $800 million less revenue and $800 million higher
expenditures than budgeted. As a result, revenues only exceed expenditures by
about $500 million. However, this was the first operating surplus in four
years and reduced the accumulated deficit to $2.0 billion, after taking into
account certain other accounting reserves.
CURRENT BUDGET. The 1994-95 Budget Act was passed on July 8, 1994,
and provides for an estimated $41.9 billion of General Fund revenues, and $40.9
billion of expenditures. The budget assumed receipt of about $750 million of
new federal assistance for the costs of incarceration, education, health and
welfare related to undocumented immigrants. Other major components of the
budget include further reductions in health and welfare costs, some additional
transfers of funds from local government, and a plan to defer retirement of $1
billion of the accumulated budget deficit until the 1995-96 fiscal year. The
Federal government has apparently budgeted only $33 million of this immigration
aid. However, this shortfall is expected to be almost fully offset by higher
than projected revenues, and lower than projected caseload growth as the
economy improves.
Because of the accumulated budget deficit over the past several years,
the payment of certain unbudgeted expenditures to schools to maintain constant
per-pupil aid levels, and a reduction of the level of available internal
borrowing, the State's cash resources have been significantly depleted. This
has required the State to rely on a series of external borrowings for the past
several years to pay its normal expenses, including borrowings which have gone
past the end of the fiscal year. In February 1994, the State borrowed $3.2
billion, maturing by December, 1994. In July 1994, the State borrowed a total
of $7.0 billion to meet its cash flow requirements for the 1994-95 fiscal year
and to fund part of its deficit into the 1995-96 fiscal year. A total of $4.0
billion of this borrowing matures in April, 1996. The State will continue to
have to rely on external borrowing to meet its cash needs to the foreseeable
future.
In order to assure repayment of the $4 billion, 22-month borrowing,
the State enacted legislation (the "Trigger Law") which can lead to automatic,
across-the-board cuts in General Fund expenditures in either the 1994-95 or
1995-96 fiscal years if cash flow projections made at certain times during
those years show deterioration from the projections made in July 1994, when the
borrowings were made. On November 15, 1994, the State Controller as part of
the Trigger Law reported that the cash position of the General Fund on June 30,
1995 would be about $580 million better than earlier projected, so no automatic
budget adjustments were required in 1994-95. The Controller's report showed
that loss of federal funds was offset by higher revenues, lower expenditures,
and certain other increases in cash resources.
The proposed Governor's Budget for the 1995-96 Fiscal Year projects
General Fund
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revenues of $42.5 billion and expenditures of $41.7 billion. The Governor's
Budget projects that all the accumulated budget deficits will be repaid by June
30, 1996, with a small balance ($92 million) in the Special Fund for Economic
Uncertainties, the budget reserve. The proposed budget assumes receipt of
about $830 million of new federal aid for undocumented aliens' costs and also
assumes success in certain ongoing litigation concerning previous budget
actions. The Governor has proposed a 15% cut in personal income and corporate
taxes, to be phased in over three years starting in 1996.
RATING AGENCIES. The ongoing structural imbalances, growing
accumulated deficits, and sluggish recovery of the California economy have
placed the State under ongoing scrutiny from the municipal credit rating
agencies. In July 1994, both Moody's and S&P's lowered their ratings on the
State's general obligation debt. Moody's dropped the State from a rating of Aa
to A1 and S&P reduced the rating from A+ to A. Fitch lowered its rating from
Aa to A. Despite the progress in producing break-even financial operations,
the agencies concluded that the State still confronts a continuing fiscal
challenge. The major concerns cited by the agencies included the failure to
directly address most of the accumulated deficit, the potential for the untried
budget triggers to produce fraconian cuts in program expenditures, high
short-term debt and optimistic revenue forecasts.
CONSTITUTIONAL CONSIDERATIONS. Changes in California laws during the
last two decades have limited the ability of California State and municipal
issuers to obtain sufficient revenue to pay their bond obligations.
In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13. Proposition 13 limits ad valorem
(according to value) taxes on real property and restricts the ability of taxing
entities to increase real property taxes and assessments, and limits the
ability of local governments to raise other taxes.
Article XIII B of the California Constitution (the "Appropriation
Limit") imposes a limit on annual appropriations. Originally adopted in 1979,
Article XIII B was modified by Proposition 98 in 1988 and Proposition 111 in
1990. The appropriations subject to the Article consist of tax proceeds which
include tax revenues and certain other funds. Excluded from the Appropriation
Limits are prior (pre 1979) debt service and subsequent debt incurred as the
result of voter authorizations, court mandates, qualified capital outlay
projects and certain increases in gasoline taxes and motor vehicle weight fees.
Certain civil disturbance emergencies declared by the Governor and
appropriations approved by a two-thirds vote of the legislature are excluded
from the determination of excess appropriations, and the appropriations limit
may be overridden by local voter approval for up to a four-year period.
On November 8, 1988, California voters approved Proposition 98, a
combined initiative constitutional amendment and statute called "the Classroom
Instruction Improvement and Accountability Act". This amendment changed school
funding below the University level by guaranteeing K-14 schools a minimum share
of General Fund Revenues. Suspension of the
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Proposition 98 funding formula requires a two-thirds vote of Legislature and
the Governor's concurrence. Proposition 98 also contains provisions
transferring certain funds in excess of the Article III B limit to K-14
schools.
As amended by Proposition 111, the Appropriation Limit recalculated
annually by taking the actual Fiscal Year 1986-1987 limit and applying the
Proposition 111 cost of living and population adjustments as if that limit had
been in effect. The Appropriations Limit is tested over consecutive two-year
periods under this amendment. Any excess "proceeds of taxes" received over
such two-year period above the Appropriation Limits for the two-year period is
divided equally between transfers to K-14 and taxpayers.
Throughout the next few fiscal years, the State's financial
difficulties are expected to remain serious. As more operational and fiscal
responsibilities are shifted to local governments, there will be additional
pressure exerted upon local governments, especially counties and school
districts which rely upon State aid.
Certain debt obligations held by the Fund may be payable solely from
lease payments on real property leased to the State, counties, cities or
various public entities structured in such a way as to not constitute a debt to
the leasing entity. To ensure that a debt is not technically created,
California law requires that the lessor can proportionally reduce its lease
payments equal to its loss of beneficial use and occupancy. Moreover, the
lessor does not agree to pay lease payments beyond the current period; it only
agrees to include lease payments in its annual budget every year. In the event
of a default, the only remedy available against the lessor is that of reletting
the property or suing annually for the rents due; no acceleration of lease
payments is permitted.
The Fund also holds debt obligations payable solely from the revenues
of health care institutions. Certain provisions under California state law may
adversely affect these revenues and, consequently, payment of those debt
obligations.
The Federally sponsored Medicaid program for health care services to
eligible welfare recipients is known as the Medi-Cal program. In the past, the
Medi-Cal program has provided a cost-based system of reimbursement for
impatient care furnished to Medi- Cal beneficiaries by any eligible hospital.
The State now selectively contracts by county with California hospitals to
provide reimbursement for non-emergency inpatient services to Medi-Cal
beneficiaries, generally on a flat per-diem payment basis regardless of cost.
California law also permits private health plans and insurers to contract
selectively with hospitals for services to beneficiaries on negotiated terms,
generally at rates lower than standard charges.
Debt obligations payable solely from revenues of health care
institutions may also be insured by the state pursuant to an insurance program
operated by the Office of Statewide Health Planning and Development (the
"Office"). Most of such debt obligations are secured by a mortgage of real
property in favor of the Office and the holders. If a default occurs on such
insured debt obligations, the Office has the option of either continuing to
meet debt service obligations of foreclosing the mortgage and requesting the
State Treasurer to issue debentures payable from a reserve fund established
under the insurance fund or payable from appropriated state funds.
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Security for certain debt obligations held by the Fund may be in form
of a mortgage or deed of trust on real property. California has statutory
provisions which limit the remedies of a creditor secured by a mortgage or deed
of trust. Principally, the provisions establish conditions governing the
limits of a creditor's right to a deficiency judgment. In the case of a
default, the creditor's rights under the mortgage or deed of trust are subject
to constraints imposed by California real property law upon transfers of title
to real property by private power of sale. These laws require that the loan
must have been in arrears for at least seven months before foreclosure
proceedings can begin. Under California's anti-deficiency legislation, there
is no personal recourse against a mortgagor of single-family residence
regardless of whether the creditor chooses judicial or non-judicial
foreclosure. These disruptions could disrupt the stream of revenues available
to the issuer for paying debt service.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment changes on
such mortgage loans may be imposed only with respect to voluntary payments made
during the first five years of the mortgage loan, and cannot in any event
exceed six months advance interest on the amount prepaid in excess of 20% of
the original principal amount of the mortgage loan. This limitation could
affect the flow of revenues available to the issuer for debt service on these
outstanding debt obligations.
Substantially all of California is located within an active geologic
region subject to major seismic activity. Any California municipal obligation
in the Fund could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (1) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (2) an issuer to perform on its
contract of insurance in the event of widespread losses; or (3) the Federal or
State government to appropriate sufficient funds within their respective budget
limitations.
The January 1994 major earthquake in greater Los Angeles (Northridge)
was estimated to have resulted in up to $20 billion in property damage.
Significant damage was incurred by public and private facilities in four
counties. Los Angeles, Ventura, Orange and San Bernadino Counties were
declared State and Federal disasters. The Federal government approved a total
of $9.5 billion in earthquake relief funds for assistance to homeowners and
small businesses, as well as repair of damaged public facilities.
As described in the summary above, the Fund's investments are
susceptible to possible adverse effects of the complex political, economic and
regulatory matters affecting California issuers. As stated in the Prospectus,
in the view of the Investment Adviser, it is impossible to determine the impact
of any legislation, voter initiatives or other similar measures which have been
or may be introduced to limit or increase the taxing or spending authority of
state and local governments or to predict such governments' abilities to pay
the interest on, or repay the principal of, its obligations.
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CERTAIN INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES. In order to generate additional
income, the Fund may, from time to time, lend securities from its portfolios to
brokers, dealers and financial institutions such as banks and trust companies.
Such loans will be secured by collateral consisting of cash or U.S. Government
securities which will be maintained in an amount equal to at least 100% of the
current market value of the loaned securities. During the period of the loan,
the Fund will receive the income on both the loaned securities and the
collateral and thereby increase its return. Cash collateral will be invested in
short-term high quality debt securities, which will increase the current income
of the Fund. The loans will be terminable by the Fund at any time and by the
borrower on one day's notice. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as rights to
interest or other distributions or voting rights on important issues. The Fund
may pay reasonable fees to persons unaffiliated with the Fund for services in
arranging such loans. Lending of portfolio securities involves a risk of failure
by the borrower to return the loaned securities, in which event the Fund may
incur a loss.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time. When the Fund engages in forward commitment and
when-issued transactions, it relies on the seller to consummate the transaction.
The failure of the issuer or seller to consummate the transaction may result in
the Fund losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued and forward commitment
basis also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on
a when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. A
repurchase agreement is a contract under which the Fund would acquire a security
for a relatively short period (generally not more than 7 days) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). The Fund will
enter into repurchase agreements only with member banks of the Federal Reserve
System and with securities dealers. The Investment Adviser will continuously
monitor the creditworthiness of the parties with whom the Fund enters into
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repurchase agreements. The Fund has established a procedure providing that the
securities serving as collateral for each repurchase agreement must be delivered
to the Fund's custodian either physically or in book-entry form and that the
collateral must be marked to market daily to ensure that each repurchase
agreement is fully collateralized at all times. In the event of bankruptcy or
other default by a seller of a repurchase agreement, the Fund could experience
delays in liquidating the underlying securities and could experience losses,
including the possible decline in the value of the underlying securities during
the period which the Fund seeks to enforce its rights thereto, possible
subnormal levels of income and lack of access to income during this period, and
the expense of enforcing its rights.
The Fund is permitted to engage in certain hedging techniques involving
options and futures transactions in order to reduce the effect of interest rate
movements affecting the market values of the investments held, or intended to be
purchased, by the Fund.
OPTIONS ON DEBT SECURITIES. The Fund may purchase and write put and
call options on debt securities which are traded on a national securities
exchange (an "Exchange") to protect its holdings in municipal bonds against a
substantial decline in market value. Securities are considered related if their
price movements generally correlate to one another. The purchase of put options
on debt securities which are related to securities held in its portfolio will
enable the Fund to protect, at least partially, unrealized gains in an
appreciated security in its portfolio without actually selling the security. In
addition, the Fund may continue to receive tax-exempt interest income on the
security. However, under certain circumstances the Fund may not be treated as
the tax owner of a security held subject to a put option, in which case interest
with respect to such security would not be tax-exempt for the Fund. The purchase
of call options on debt securities may help to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability to invest in such securities in an orderly manner.
The Fund may sell put and call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other transaction
costs paid in connection with the option which is sold.
In order to protect partially against declines in the value of its
portfolio securities, the Fund may sell (write) call options on debt securities.
A call option gives the purchaser of such option in return for a premium paid,
the right to buy, and the seller has the obligation to sell, the underlying
security at the exercise price if the option is exercised during the option
period. The writer of the call option who receives the premium has the
obligation to sell the underlying security to the purchaser at the exercise
price during the option period if assigned an exercise notice. The Fund will
write call options only on a covered basis, which means that it will own the
underlying security subject to a call option at all times during the option
period. The
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exercise price of a call option may be below, equal to or above the current
market value of the underlying security at the time the option is written.
During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier point in time when the writer effects a closing
purchase transaction.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, in conjunction with the sale of the underlying security or to
enable the Fund to write another call option on the underlying security with a
different exercise price or different expiration date or both.
The Fund will write cash secured put options in order to facilitate its
ability to purchase a security at a price lower than the current market price of
such security. The Fund will write put options only on a "cash secured" basis
which means that if the Fund writes a "put" it will segregate cash obligations
in the event the "put" is exercised. "Puts" will only be written in furtherance
of the basic investment objectives of the Fund relating to the acquisition of
tax exempt securities and will not be written with the primary intent of
generating income from premiums paid to the Fund in connection with the sale of
the "put".
The purchase and writing of put and call options involves certain
risks. During the option period, the covered call writer has, in return for the
premium on the option, given up the opportunity to profit from a price increase
in the underlying securities above the exercise price, but, as long as its
obligation as a writer continues, has retained the risk of loss in the event the
price of the underlying security declines. A secured put writer assumes the risk
that the underlying security will fall below the exercise price in which case
the writer could be required to purchase the security at a higher price than the
then current market price of the security. In either instance, the writer has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities, in the
case of a call, or acquire the contract securities, in the case of a put, at the
exercise price. If a put or call option purchased by the Fund is not sold when
it has remaining value, and if the market price of the underlying security
remains equal to or greater than the exercise price, in the case of a put, or
equal to or less than the exercise price, in the case of a call, the Fund will
lose its entire investment in the option. Also, where a put or a call option on
a particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.
The Fund will not invest in a put or a call option if as a result the
amount of premiums paid for such options then outstanding, when added to the
premiums paid for financial and index futures and put and call options on such
futures, would exceed 10% of the Fund's total assets.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may engage in the
purchase and
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sale of interest rate futures contracts ("financial futures") and
tax-exempt bond index futures contracts ("index futures") and the purchase and
writing of put and call options thereon, as well as put and call options on
tax-exempt bond indexes (if and when they are traded) only as a hedge against
changes in the general level of interest rates in accordance with strategies
more specifically described below.
The purchase of a financial futures contract obligates the buyer to
accept and pay for the specific type of debt security called for in the contract
at a specified future time and at a specified price. The Fund would purchase a
financial futures contract when it is not fully invested in long-term debt
securities but wishes to defer its purchases for a time until it can invest in
such securities in an orderly manner or because short-term yields are higher
than long-term yields. Such purchases would enable the Fund to earn the income
on a short-term security while at the same time minimizing the effect of all or
part of an increase in the market price of the long-term debt security which the
Fund intends to purchase in the future. A rise in the price of the long-term
debt security prior to its purchase either would generally be offset by an
increase in the value of the futures contract purchased by the Fund or avoided
by taking delivery of the debt securities under the futures contract.
The sale of a financial futures contract obligates the seller to
deliver the specific type of debt security called for in the contract at a
specified future time and at a specified price. The Fund would sell a financial
futures contract in order to continue to receive the income from a long-term
debt security, while endeavoring to avoid part or all of the decline in market
value of that security which would accompany an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security held by the
Fund would be substantially offset by an increase in the value of the futures
contract sold by the Fund. While the Fund could sell a long-term debt security
and invest in a short-term security, ordinarily the Fund would give up income on
its investment, since long-term rates normally exceed short-term rates.
In addition, the Fund may purchase and write put and call options on
financial futures contracts which are traded on an Exchange or a Board of Trade
and enter into closing transactions with respect to such options to terminate an
existing position. Options on financial futures contracts are similar to options
on securities except that a put option on a financial futures contract gives the
purchaser the right in return for the premium paid to assume a short position in
a financial futures contract and a call option on a financial futures contract
gives the purchaser the right in return for the premium paid to assume a long
position in a financial futures contract.
The Fund anticipates purchasing and selling tax-exempt bond index
futures as a hedge against changes in the market value of the tax exempt bonds
which it holds. A tax-exempt bond index fluctuates with changes in the market
values of the tax-exempt bonds included in the index. An index future has
similar characteristics to a financial future except that settlement is made
through delivery of cash rather than the underlying securities. The sale of an
index future obligates the seller to deliver at settlement an amount of cash
equal to a
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specified dollar amount multiplied by the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the future was originally written.
The Fund may also purchase and write put and call options on tax-exempt
bond indexes (if and when such options are traded) and enter into closing
transactions with respect to such options. An option on an index future is
similar to an option on a debt security except that an option on an index future
gives the holder the right to assume a position in an index future. The Fund
will use options on futures contracts and options on tax-exempt bond indexes (if
and when they are traded) in connectionwith hedging strategies. Generally, these
strategies would be employed under the same market conditions in which the Fund
would use put and call options on debt securities.
The Fund may hedge up to the full value of its portfolio through the
use of options and futures. At the time the Fund purchases a futures contract,
an amount of cash or U.S. Government securities at least equal to the market
value of the futures contract will be deposited in a segregated account with the
Fund's Custodian to collateralize the position and thereby insure that such
futures contract is unleveraged. The Fund may not purchase or sell futures
contracts or purchase or write related put or call options if immediately
thereafter the sum of the amount of margin deposits on the Fund's existing
futures and related options positions and the amount of premiums paid for
related options (measured at the time of investment) would exceed 5% of the
Fund's total assets.
While the Fund's hedging transactions may protect the Fund against
adverse movements in the general level of interest rates, such transactions
could also preclude the opportunity to benefit from favorable movements in the
level of interest rates. Due to the imperfect correlation between movements in
the prices of futures contracts and movements in the prices of the related
securities being hedged, the price of a futures contract may move more than or
less than the price of the securities being hedged. There is an increased
likelihood that this will occur when a tax-exempt security is hedged by a
futures contract on a taxable security. Options on futures contracts are
generally subject to the same risks applicable to all option transactions. In
addition, the Fund's ability to use this technique will depend in part on the
development and maintenance of a liquid secondary market for such options. For a
discussion of the inherent risks involved with futures contracts and options
thereon, see "Risks Relating to Transactions in Futures Contracts and Related
Options" below.
The Fund's policies permitting the purchase and sale of futures
contracts and the purchase and writing of related put or call options for
hedging purposes only may not be changed without the approval of shareholders
holding a majority of the Fund's outstanding voting securities. The Trustees may
authorize procedures, including numerical limitations, with regard to such
transactions in furtherance of the Fund investment objectives. Such procedures
are not deemed to be fundamental and may be changed by the Trustees without the
vote of the Fund's shareholders.
RISKS RELATING TO TRANSACTIONS IN FUTURES CONTRACTS AND RELATED
OPTIONS. Positions in futures contracts may be closed out only on an exchange or
board of trade which provides a market for such futures. Although the Fund
intends to purchase or sell futures contracts only on exchanges or boards of
trade where there appears to be an active market, there is no
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assurance that a liquid market on an exchange or board of trade will exist for
any particular contract or at any particular time. In the event a liquid market
does not exist, it may not be possible to close a futures position, and in the
event of adverse price movements, the Fund would continue to be required to make
daily cash payments of maintenance margin. In addition, limitations imposed by
an exchange or board of trade on which futures contracts are traded may compel
or prevent the Fund from closing out a contract which may result in reduced gain
or increased loss to the Fund. The absence of a liquid market in futures
contracts might cause the Fund to make or take delivery of the underlying
securities at a time when it may be disadvantageous to do so. The purchase of
put options on futures contracts involves less potential dollar risk to the Fund
than an investment of equal amount in futures contracts, since the premium is
the maximum amount of risk the purchaser of the option assumes. The entire
amount of the premium paid for an option can be lost by the purchaser, but no
more than that amount.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions upon
its investments set forth below which may not be changed without the approval by
the holders of a majority of the outstanding shares of the Fund. A majority for
this purpose means: (a) more than 50% of the outstanding shares of the Fund or
(b) 67% or more of the shares represented at a meeting where more than 50% of
the outstanding shares of the Fund are represented, whichever is less. Under
these restrictions, the Fund may not:
1. Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption
requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at
the time the borrowing was made. While borrowings exceed 5% of
the value of the Fund's total assets, the Fund will not
purchase any additional securities. Interest paid on borrowings
will reduce the Fund's net investment income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 10% of the value of its total assets
but only to secure borrowings for temporary or emergency
purposes or as may be necessary in connection with maintaining
collateral in connection with writing put and call options or
making initial margin deposits in connection with the purchase
or sale of financial futures, index futures contracts and
related options.
3. With respect to 75% of its total assets, purchase securities
(other than obligations issued or guaranteed by the United
States government, its agencies or instrumentalities and shares
of other investment companies) of any issuer if the purchase
would cause immediately thereafter more than 5% of the value of
the Fund's total assets invested in the securities of such
issuer or the Fund
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would own more than 10% of the outstanding voting securities of
such issuer.
4. Make loans to others, except through the purchase of
obligations in which the Fund is authorized to invest, entering
in repurchase agreements and lending portfolio securities in an
amount not exceeding one third of its total assets.
5. Purchase securities subject to restrictions on disposition
under the Securities Act of 1933 or securities which are not
readily marketable if such purchase would cause the Fund to
have more than 10% of its net assets invested in such types of
securities.
6. Purchase or retain the securities of any issuer, if those
officers and Trustees of the Fund or the Investment Adviser who
own beneficially more than of 1% of the securities of such
issuer, together own more than 5% of the securities of such
issuer.
7. Write, purchase or sell puts, calls or combinations thereof,
except put and call options on debt securities, futures
contracts based on debt securities, indices of debt securities
and futures contracts based on indices of debt securities, sell
securities on margin or make short sales of securities or
maintain a short position, unless at all times when a short
position is open it owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as,
and equal in amount to, the securities sold short, and unless
not more than 10% of the Fund's net assets (taken at current
value) is held as collateral for such sales at any one time.
8. Underwrite the securities of other issuers, except insofar as
the Fund may be deemed an underwriter under the Securities Act
of 1933 in disposing of a portfolio security.
9. Invest more than 25% of its assets in the securities of
"issuers" in any single industry; provided that there shall be
no limitation on the purchase of obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities or by any state or political subdivision
thereof. For purposes of this limitation when the assets and
revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by
the assets and revenues of the entity, the entity would be
deemed to be the sole issuer of the security. Similarly, in the
case of an industrial development or pollution control bond, if
that bond is backed only by the assets and revenues of the
nongovernmental user, then such nongovernmental user would be
deemed to be the sole issuer. If, however, in either case, the
creating government or some other entity guarantees a security,
such a guarantee would be considered a separate security and
would be treated as an issue of such government or other entity
unless all securities issued or guaranteed by the government or
other entity owned by the Fund does not exceed 10% of
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the Fund's total assets.
10. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, except
commodities and commodities contracts which are necessary to
enable the Fund to engage in permitted futures and options
transactions necessary to implement hedging strategies, or oil
and gas interests. This limitation shall not prevent the Fund
from investing in municipal securities secured by real estate
or interests in real estate or holding real estate acquired as
a result of owning such municipal securities.
11. Invest in common stock or in securities of other investment
companies, except that securities of investment companies may
be acquired as part of a merger, consolidation or acquisition
of assets and units of registered unit investment trusts whose
assets consist substantially of tax-exempt securities may be
acquired to the extent permitted by Section 12 of the Act or
applicable rules.
12. Invest more than 5% of the value of its total assets in
securities of issuers having a record, including predecessors,
of fewer than three years of continuous operation, except
obligations issued or guaranteed by the United State
Government, its agencies or instrumentalities, unless the
securities are rated by a nationally recognized rating service.
13. Issue any senior securities, except insofar as the Fund may be
deemed to have issued a senior security by: entering into a
repurchase agreement; purchasing securities in a when-issued or
delayed delivery basis; purchasing or selling any options or
financial futures contract; borrowing money or lending
securities in accordance with applicable investment
restrictions.
In order to comply with certain state regulatory policies, the Fund has
adopted a non-fundamental policy prohibiting the purchase of warrants. The
Fund's Trustees have approved the following non-fundamental investment policy
pursuant to an order of the SEC: Notwithstanding any investment restriction to
the contrary, the Fund may, in connection with the John Hancock Group of Funds
Deferred Compensation Plan for Independent Trustees/Directors, purchase
securities of other investment companies within the John Hancock Group of Funds
provided that, as a result, (i) no more than 10% of the Fund's assets would be
invested in securities of all other investment companies, (ii) such purchase
would not result in more than 3% of the total outstanding voting securities of
any one such investment company being held by the Fund and (iii) no more than 5%
of the Fund's assets would be invested in any one such investment company.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers
who are
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responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and directors of John Hancock Adviser's Inc, (the "Investment
Adviser") or officers and directors of the Fund's distributor, John Hancock
Funds, Inc. (the "Distributor").
Set forth below is information with respect to each of the Fund's
officers and Trustees. The officers and Trustees may be contacted at 101
Huntington Avenue, Boston, MA 02199-7603. Their affiliations represent their
principal occupations during the past five years.
EDWARD J. BOUDREAU, JR.,* Trustee, Chairman and Chief Executive Officer.
Chairman and Chief Executive Officer, the Investment Adviser and The
Berkeley Financial Group ("The Berkeley Group"); Chairman, NM Capital
Management, Inc. ("NM Capital"); John Hancock Advisers International
Limited ("Advisers International"); John Hancock Funds, Inc; John
Hancock Investor Services Corporation ("Investor Services"); and
Sovereign Asset Management Corporation ("SAMCorp"); (hereinafter the
Investment Adviser, the Berkeley Group, NM Capital, Advisers
International, John Hancock Funds, Inc., Investor Services and SAMCorp
are collectively referred to as the "Affiliated Companies"); Chairman,
First Signature Bank & Trust; Director, John Hancock Freedom Securities
Corporation, John Hancock Capital Corporation, New England/Canada
Business Council; Member, Investment Company Institute Board of
Governors; Trustee, Museum of Science; President, the Investment
Adviser (until July 1992); Trustee or Director of other investment
companies managed by the Investment Adviser; and Chairman, John Hancock
Distributors, Inc. (until April, 1994).
JAMES F. CARLIN, Trustee. Chairman and CEO, Carlin Consolidated, Inc.
(insurance); Director, Arbella Mutual Insurance Company (insurance),
Consolidated Group Trust (group health plan), Carlin Insurance Agency,
Inc. and West Insurance Agency, Inc.; Receiver, the City of Chelsea
(until August 1992); and Trustee or Director of other investment
companies managed by the Investment Adviser.
WILLIAM H. CUNNINGHAM, Trustee. Chancellor, University of Texas System and
former President of the University of Texas, Austin, Texas; Regents
Chair in Higher Education Leadership; James L. Bayless Chair for Free
Enterprise; Director, LaQuinta Motor Inns, Inc. (hotel management
company); Director, Jefferson-Pilot Corporation (diversified life
insurance company); Director, Freeport-McMoran Inc. (oil and gas
company); Director, Barton Creek Properties, Inc. (1988-1990) (real
estate development) and Director LBJ Foundation Board (education
foundation); and Advisory Director, Texas Commerce Bank - Austin.
CHARLES L. LADNER, Trustee. Director, Energy North, Inc. (public utility
holding company); Senior Vice President, Finance UGI Corp (public
utility holding company) (until 1992); and Trustee or Director of other
investment companies managed by the Investment Adviser.
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company
Act").
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LEO E. LINBECK, JR., Trustee. Chairman, President, Chief Executive Officer and
Director, Linbeck Corporation (a holding company engaged in various
phases of the construction industry and warehousing interests);
Director and Chairman, Federal Reserve Bank of Dallas; Chairman of the
Board and Chief Executive Officer, Linbeck Construction Corporation;
Director, Panhandle Eastern Corporation (a diversified energy company);
Director, Daniel Industries, Inc. (manufacturer of gas measuring
products and energy related equipment); Director, GeoQuest
International, Inc. (a geophysical consulting firm); and Director,
Greater Houston Partnership.
PATRICIA P. MCCARTER, Trustee. Director and Secretary, the McCarter Corp.
(machine manufacturer); and Trustee or Director of other investment
companies managed by the Investment Adviser.
STEVEN R. PRUCHANSKY, Trustee. Director and Treasurer, Mast Holdings, Inc.;
Director, First Signature Bank & Trust Company (until August 1991);
General Partner, Mast Realty Trust; President, Maxwell Building Corp.
(until 1991); and Trustee or Director of other investment companies
managed by the Investment Adviser.
NORMAN H. SMITH, Trustee. Lieutenant General, USMC, Deputy Chief of Staff for
Manpower and Reserve Affairs, Headquarters Marine Corps; Commanding
General III Marine Expeditionary Force/3rd Marine Division (retired
1991); and Trustee or Director of other investment companies managed by
the Investment Adviser.
JOHN P. TOOLAN, Trustee. Director, The Smith Barney Muni Bond Funds, The Smith
Barney Tax-Free Money Fund, Inc., Vantage Money Market Funds (mutual
funds), The Inefficient-Market Fund, Inc. (closed-end investment
company) and Smith Barney Trust Company of Florida; Chairman, Smith
Barney Trust Company (retired December, 1991); Director, Smith Barney,
Inc., Mutual Management Company and Smith, Barney Advisers, Inc.
(investment advisers) (retired 1991); and Senior Executive Vice
President, Director and member of the Executive Committee, Smith
Barney, Harris Upham & Co, Incorporated (investment bankers) (until
1991); and Trustee or Director of other investment companies managed by
the Investment Adviser.
ROBERT G. FREEDMAN,* Vice Chairman and Chief Investment Officer. Vice President
and Chief Investment Officer, the Investment Adviser; President, the
Investment Adviser (until December 1994).
ANNE C. HODSDON,* President. President and Chief Operations Officer, the
Investment Adviser; Executive Vice President, the Investment Adviser
(until December 1994).
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company
Act").
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JAMES B. LITTLE,* Senior Vice President and Chief Financial Officer. Senior
Vice President, the Investment Adviser.
THOMAS H. DROHAN,* Senior Vice President and Secretary. Senior Vice President
and Secretary, the Investment Adviser.
MICHAEL P. DICARLO,* Senior Vice President. Senior Vice President, the
Investment Adviser.
EDGAR LARSEN,* Senior Vice President. Formerly Senior Portfolio Manager,
Transamerica Fund Management Company.
B.J. WILLINGHAM,* Senior Vice President. Senior Vice President, the Investment
Adviser. Formerly, Director and Chief Investment Officer of
Transamerica Fund Management Company.
JAMES J. STOKOWSKI,* Vice President and Treasurer. Vice President, the
Investment Adviser.
SUSAN S. NEWTON,* Vice President and Compliance Officer. Vice President and
Assistant Secretary, the Investment Adviser.
JOHN A. MORIN,* Vice President. Vice President, the Investment Adviser.
THOMAS J. PRESS,* Vice President and Assistant Secretary. Vice President, the
Investment Adviser. Formerly, General Counsel and Secretary,
Transamerica Management Company; Secretary and Treasurer, Transamerica
Asset Management Group, Inc.; and Secretary, Transamerica Fund
Distributors, Inc.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Investment Adviser serves as investment adviser.
As of April 6, 1995, there were 33,684,734 shares of the Fund
outstanding and officers and trustees of the Fund as a group beneficially owned
less than 1% of these outstanding shares. As of April 6, 1995, Merrill Lynch
Pierce Fenner & Smith, 4800 Deerlake Dr. East, Jacksonville, FL held 2,775,039
shares representing 8.24% of the Fund's outstanding Class A and Class B Shares
(such ownership is as nominee only and does not represent beneficial ownership).
At such date, no other person owned of record or was known by the Fund to own
beneficially as much as 5% of the outstanding shares of the Fund.
As of December 22, 1994, the Trustees have established an Advisory
Board which acts to facilitate a smooth transition of management over a two-year
period (between Transamerica Fund Management Company ("TFMC"), the prior
investment adviser, and the Investment Adviser). The members of the Advisory
Board are distinct from the Board of
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company
Act").
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<PAGE> 195
Trustees, do not serve the Fund in any other capacity and are persons who have
no power to determine what securities are purchased or sold and behalf of the
Fund. Each member of the Advisory Board may be contacted at 101 Huntington
Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal
occupations during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas;
co-founder, Houston Parents' League; former board member of various
civic and cultural organizations in Houston, including the Houston
Symphony, Museum of Fine Arts and YWCA. Mrs. Bentsen is presently
active in various civic and cultural activities in the Washington, D.C.
area, including membership on the Area Board for The March of Dimes and
is a National Trustee for the Botanic Gardens of Washington, D. C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce
Bank; Trustee, Memorial Hospital System; Chairman of the Board of
Regents of Baylor University; Member, Board of Governors, National
Association of Securities Dealers, Inc.; Formerly, Chairman, Investment
Company Institute; formerly, President, Houston Chapter of Financial
Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation);
Member, Board of Managers, Harris County Hospital District; Advisory
Director, Commercial State Bank, El Campo; Advisory Director, First
National Bank of Bryan; Advisory Director, Sterling Bancshares; Former
Director and Vice Chairman, Texas Commerce Bancshares; and Vice
Chairman, Texas Commerce Bank.
COMPENSATION OF THE TRUSTEES AND ADVISORY BOARD. Each Independent
Trustee receives an annual retainer of $44,000, a meeting fee of $4,000 for each
of the four regularly scheduled meetings held during the year and a fee of $25
per day or actual travel expenses, whichever is greater. This compensation is
apportioned among the John Hancock funds, including the Fund, on which such
Trustees serve based on the net asset value of such funds. The following table
provides information regarding the compensation paid by the Fund and the other
investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services. Mr. Boudreau, a
non-Independent Trustee, and each of the officers of the Funds are interested
persons of the Investment Adviser, are compensated by the Investment Adviser and
received no compensation from the Funds for their services.
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<PAGE> 196
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from all Funds in
Aggregate Benefits Accrued John Hancock
Compensation as Part of the Fund Complex to
Trustees from the Fund Fund's Expenses Trustees**
- -------- ------------- ---------------------------------------------
<S> <C> <C> <C>
James F. Carlin $ 0 $0 $ 60,450
William H. Cunningham $ 4,000* $0 $ 0
Charles L. Ladner $ 0 $0 $ 60,450
Leo E. Linbeck, Jr. $ 5,400 * $0 $ 0
Patricia P. McCarter $ 0 $0 $ 60,200
Steven R. Pruchansky $ 0 $0 $ 62,450
Norman H. Smith $ 0 $0 $ 62,450
John P. Toolan $ 0 $0 $ 60,450
</TABLE>
* Compensation made pursuant to different compensation arrangements
then in effect.
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is $366,450 as of the calendar year ended
December 31, 1994. All Trustees/Directors except Messrs. Cunningham
and Linbeck are Trustees/Directors of 39 funds in the John Hancock
Fund Complex. Messrs. Cunningham and Linbeck are Trustees of 21
funds. (The Fund was not part of the John Hancock Fund Complex
until December 22, 1994 and Messrs. Cunningham and Linbeck were not
trustees or directors of any funds in the John Hancock Fund Complex
prior to December 22, 1994.)
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from Certain Funds
Aggregate Benefits Accrued in John Hancock
Compensation as Part of the Fund Complex to
Advisory Board*** from the Fund Fund's Expenses Advisory Board***
- -------------- ------------- --------------- -------------------
<S> <C> <C> <C>
R. Trent Campbell $ 3,176 $0 $ 54,000
Mrs. Lloyd Bentsen $ 3,176 $0 $ 54,000
Thomas R. Powers $ 3,176 $0 $ 54,000
Thomas B. McDade $ 3,176 $0 $ 54,000
TOTAL $112,704 $0 $ 216,000
</TABLE>
*** Estimated for the Fund's current fiscal year ending December 31, 1995.
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment
advice from the Investment Adviser. Investors should refer to the Prospectus
for a description of certain information concerning the investment management
contract. Each of the Trustees and principal officers of the Fund who is also
an affiliated person of the Investment Adviser is named above, together with
the capacity in which such person is affiliated with the Fund and the
Investment Adviser.
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<PAGE> 197
The Investment Adviser, located at 101 Huntington Avenue, Boston,
Massachusetts 02199-7603, was organized in 1968 and more than $13 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,000,000 shareholders.
The Investment Adviser is a wholly-owned subsidiary of The Berkeley Financial
Group, which is in turn a wholly-owned subsidiary of John Hancock Subsidiaries,
Inc., which is in turn a wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), one of the nation's oldest and largest
financial services companies. With total assets under management of over $80
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries Standard & Poor's and A.M. Best's highest
ratings. Founded in 1862, the Life Company has been serving clients for over
130 years.
The Fund has entered into an investment management contract with the
Investment Adviser. Under the investment management contract, the Investment
Adviser provides the Fund with (i) a continuous investment program, consistent
with the Fund's stated investment objective and policies, (ii) supervision of
all aspects of the Fund's operations except those that are delegated to a
custodian, transfer agent or other agent and (iii) such executive,
administrative and clerical personnel, officers and equipment as are necessary
for the conduct of its business. See "Organization and Management of the Fund"
and "The Fund's Expenses" in the Prospectus for a description of certain
information concerning the Fund's investment management contract.
No person other than the Investment Adviser and its directors and
employees regularly furnishes advice to the Fund with respect to the
desirability of the Fund investing in, purchasing or selling securities. The
Investment Adviser may from time to time receive statistical or other similar
factual information, and information regarding general economic factors and
trends, from the Life Company and its affiliates.
Under the terms of the investment management contract with the Fund,
the Investment Adviser provides the Fund with office space, equipment and
supplies and other facilities and personnel required for the business of the
Fund. The Investment Adviser pays the compensation of all officers and
employees of the Fund and Trustees of the Fund affiliated with the Investment
Adviser, the office expenses of the Fund, including those of the Fund's
Treasurer and Secretary, and other expenses incurred by the Investment Adviser
in connection with the performance of its duties. All expenses which are not
specifically paid by the Investment Adviser and which are incurred in the
operation of the Fund including, but not limited to, (i) the fees of the
Trustees of the Fund who are not "interested persons," as such term is defined
in the 1940 Act (the "Independent Trustees"), (ii) the fees of the members of
the Fund's Advisory Board (described above) and (iii) the continuous public
offering of the shares of the Fund are borne by the Fund.
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<PAGE> 198
As provided by the investment management contract, the Fund pays the
Investment Adviser an investment management fee, which is accrued daily and
paid monthly in arrears, equal on an annual basis to a 0.55% of the Fund's
average daily net asset value. See "Organization and Management of the Fund"
in the Prospectus.
The Investment Adviser may voluntarily and temporarily reduce its
advisory fee or make other arrangements to limit the Fund's expenses to a
specified percentage of average daily net assets. The Investment Adviser
retains the right to re-impose the advisory fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
In the event normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any state limit
where the Fund is registered to sell shares of beneficial interest, the fee
payable to the Investment Adviser will be reduced to the extent required by
law. At this time, the most restrictive limit on expenses imposed by a state
requires that expenses charged to the Fund in any fiscal year not exceed 2.5%
of the first $30,000,000 of the Fund's average daily net asset value, 2% of the
next $70,000,000 and 1.5% of the remaining average daily net asset value. When
calculating the limit above, the Fund may exclude interest, brokerage
commissions and extraordinary expenses.
Pursuant to the investment management contract, the Investment Adviser
is not liable to the Fund or its shareholders for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which its contract relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment
Adviser in the performance of its duties or from its reckless disregard of the
obligations and duties under the contract.
The investment management contract initially expires on December 22,
1996 and will continue in effect from year to year thereafter if approved
annually by a vote of a majority of the Trustees of the Fund who are not
interested persons of one of the parties to the contract, cast in person at a
meeting called for the purpose of voting on such approval, and by either a
majority of the Trustees or the holders of a majority of the Fund's outstanding
voting securities. The management contract may, on 60 days' written notice, be
terminated at any time without the payment of any penalty by the Fund by vote
of a majority of the outstanding voting securities of the Fund, by the Trustees
or by the Investment Adviser. The management contract terminates automatically
in the event of its assignment.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Investment Adviser or its affiliates
provide investment advice. Because of different investment objectives or other
factors, a particular security may be bought for one or more funds or clients
when one or more are selling the same security. If opportunities for purchase
or sale of securities by the Investment Adviser or for other funds or clients
for which the Investment Adviser renders investment advice
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<PAGE> 199
arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds or
clients in a manner deemed equitable to all of them. To the extent that
transactions on behalf of more than one client of the Investment Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as
the investment management contract or any extension, renewal or amendment
thereof remains in effect. If the Fund's investment management contract is no
longer in effect, the Fund (to the extent that it lawfully can) will cease to
use such name or any other name indicating that it is advised by or otherwise
connected with the Investment Adviser. In addition, the Investment Adviser or
the Life Company may grant the non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
For the fiscal years ended December 31, 1992, 1993 and 1994 advisory
fees payable by the Fund to TFMC, the Fund's former investment adviser, amounted
to $1,120,887, $1,633,853 and $1,919,101, respectively; however, a portion of
such fees were not imposed pursuant to the voluntary fee and expense limitation
arrangements then in effect (see "The Fund's Expenses" in the Prospectus). For
the period from December 22, 1994 to December 31, 1994, advisory fees payable by
the Fund were paid to the Investment Adviser.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund was a party to an
administrative services agreement with TFMC (the "Services Agreement"), pursuant
to which TFMC performed bookkeeping and accounting services and functions,
including preparing and maintaining various accounting books, records and other
documents and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Fund. Other administrative
services included communications in response to shareholder inquiries and
certain printing expenses of various financial reports. In addition, such staff
and office space, facilities and equipment were provided as necessary to provide
administrative services to the Fund. The Services Agreement was amended in
connection with the appointment of the Investment Adviser as adviser to the Fund
to permit services under the Agreement to be provided to the Fund by the
Investment Adviser and its affiliates. The Services Agreement was terminated
during the current fiscal year.
For the fiscal years ended December 31, 1992, 1993 and 1994, the Fund
paid to TFMC (pursuant to the Services Agreement) $91,596, $128,984 and
$158,594, respectively, of which $51,731, $83,291 and $109,540, respectively,
was paid to TFMC and $39,865, $45,693 and $49,054, respectively, were paid for
certain data processing and pricing information services.
25
<PAGE> 200
PURCHASE OF SHARES
Shares of the Fund are offered at a price equal to their net asset
value plus a sales charge which, at the option of the purchaser, may be imposed
either at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then only will be issued for full shares. The Board of Trustees reserves
the right to change or waive the minimum investment requirements and to reject
any order to purchase shares (including purchase by exchange) when in the
judgment of the Investment Adviser such rejection is in the Fund's best
interest.
INITIAL SALES CHARGE ON CLASS A SHARES. The sales charges applicable
to purchases of Class A Shares of the Fund are described in the Fund's Class A
and Class B Prospectus. Methods of obtaining reduced sales charges referred to
generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A Shares, the investor is
entitled to cumulate current purchases with the greater of the current value
(at offering price) of the Class A Shares of the Fund, or if Investor Services
is notified by the investor's dealer or the investor at the time of the
purchase, the cost of the Class A Shares owned.
COMBINED PURCHASES. In calculating the sales charge applicable to
purchases of Class A Shares made at one time, the purchases will be combined if
made by (a) an individual, his or her spouse and their children under the age
of 21 purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
WITHOUT SALES CHARGE. As described in the Class A and Class B
Prospectus, Class A Shares of the Fund may be sold without a sales charge to
certain persons described in the Prospectus.
ACCUMULATION PRIVILEGE. Investors (including investors combining
purchases) who are already Class A Shareholders may also obtain the benefit of
the reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or value of the Class A Shares already
held by such person.
COMBINATION PRIVILEGE. Reduced sales charges (according to the
schedule set forth in the Class A and Class B Prospectus) also are available to
an investor based on the aggregate amount of his concurrent and prior
investments in Class A Shares of the Fund and shares of all other John Hancock
funds which carry a sales charge.
LETTER OF INTENTION. The reduced sales loads are also applicable to
investments made over a specified period pursuant to a Letter of Intention
("LOI"), which should be read carefully prior to its execution by an investor.
Thy Fund offers two options regarding the specified period for making
investments under the LOI. All investors have
26
<PAGE> 201
the option of making their investments over a period of thirteen (13) months.
Investors who are using the Fund as a funding medium for a qualified retirement
plan, however, may opt to make the necessary investments called for by the LOI
over a forty-eight (48) month period. These qualified retirement plans include
IRA's, SEP, SARSEP, TSA, 401(k) plans, TSA plans and 457 plans. Such an
investment (including accumulations and combinations) must aggregate $50,000 or
more invested during the specified period from the date of the LOI or from a
date within ninety (90) days prior thereto, upon written request to Investor
Services. The sales charge applicable to all amounts invested under the LOI is
computed as if the aggregate amount intended to be invested had been invested
immediately. If such aggregate amount is not actually invested, the difference
in the sales charge actually paid and the sales charge payable had the LOI not
been in effect is due from the investor. However, for the purchases actually
made with the specified period (either 13 or 48 months), the sales charge
applicable will not be higher than that which would have been applied (including
accumulations and combinations) had the LOI been for the amount actually
invested.
DISTRIBUTION CONTRACT
As discussed in the Prospectus, the Fund's shares are sold on a
continuous basis at the public offering price. The Distributor, a wholly-owned
subsidiary of the Investment Adviser, has the exclusive right, pursuant to the
distribution contract dated December 22, 1994 (the "Distribution Contract"), to
purchase shares from the Fund at net asset value for resale to the public or to
broker-dealers at the public offering price. Upon notice to all broker-dealers
("Selling Brokers") with whom it has sales agreements, the Distributor may allow
such Selling Brokers up to the full applicable sales charge during periods
specified in such notice. During these periods, such Selling Brokers may be
deemed to be underwriters as that term is defined in the Securities Act of 1933.
The Distribution Contract was initially adopted by the affirmative
vote of the Fund's Board of Trustees including the vote a majority of Trustees
who are not parties to the agreement or interested persons of any such party,
cast in person at a meeting called for such purpose. The Distribution Contract
shall continue in effect until December 22, 1994 and from year to year if
approved by either the vote of the Fund's shareholders or the Board of Trustees
including the vote of a majority of Trustees who are not parties to the
agreement or interested persons of any such party, cast in person at a meeting
called for such purpose. The Distribution Contract may be terminated at any
time, without penalty, by either party upon sixty (60) days' written notice or
by a vote of a majority of the outstanding voting securities of the Fund and
terminates automatically in the case of an assignment by the Distributor.
Total underwriting commissions for sales of the Fund's Class A Shares
for the fiscal years ended December 31, 1992, 1993 and 1994 were $2,854,274,
$2,391,072 and $1,805,845, respectively. Of such amounts $220,605, $233,560
and $126,490, respectively, were retained by the Fund's former distributor,
Transamerica Fund Distributors, Inc. and the remainder was reallowed to
dealers. For the period from December 22, 1994 to December 31, 1994,
underwriting commissions were paid to the Distributor.
27
<PAGE> 202
DISTRIBUTION PLAN. The Trustees, including the Independent Trustees
of the Fund, approved new distribution plans pursuant to Rule 12b-1 under the
1940 Act for Class A Shares ("Class A Plan") and Class B Shares ("Class B
Plan"). Such Plans were approved by a majority of the outstanding shares of
each respective class on December 16, 1994 and became effective on December 22,
1994.
Under the Class A Plan, the distribution or service fees will not
exceed an annual rate of 0.15% of the average daily net asset value of the Class
A Shares of the Fund (determined in accordance with such Fund's Prospectus as
from time to time in effect). Any expenses under the Class A Plan not
reimbursed within 12 months of being presented to the Fund for repayment are
forfeited and not carried over to future years. Under the Class B Plan, the
distribution or service fees to be paid by the Fund will not exceed an annual
rate of 1.00% of the average daily net assets of the Class B Shares of the Fund
(determined in accordance with such Fund's prospectus as from time to time in
effect); provided that the portion of such fee used to cover Service Expenses
(described below) shall not exceed an annual rate of 0.25% of the average daily
net asset value of the Class B Shares of the Fund. The Distributor has agreed
to limit the payment of expenses pursuant to the Class B Plan to 0.90% of the
average daily net assets of the Class B Shares of the Fund. Under the Class B
Plan, the fee covers the Distribution and Service Expenses (described below) and
interest expenses on unreimbursed distribution expenses. In accordance with
generally accepted accounting principles, the Fund does not treat distribution
fees in excess of 0.75% of the Fund's net assets attributable to Class B Shares
as a liability of the Fund and does not reduce the current net assets of class B
by such amount although the amount may be payable in the future.
Under the Plans, expenditures shall be calculated and accrued daily
and paid monthly or at such other intervals as the Trustees shall determine. The
fee may be spent by the Distributor on Distribution Expenses or Service
Expenses. "Distribution Expenses" include any activities or expenses primarily
intended to result in the sale of shares of the relevant class of the Fund,
including, but not limited to: (i) initial and ongoing sales compensation
payable out of such fee as such compensation is received by the Distributor or
by Selling Brokers, (ii) direct out-of-pocket expenses incurred in connection
with the distribution of shares, including expenses related to printing of
prospectuses and reports; (iii) preparation, printing and distribution of sales
literature and advertising material; (iv) an allocation of overhead and other
branch office expenses of the Distributor related to the distribution of Fund
Shares (v) distribution expenses that were incurred by the Fund's former
distributor and not recovered through payments under the Class A or Class B
former plans or through receipt of contingent deferred sales charges; and (vi)
in the event that any other investment company (the "Acquired Fund") sells all
or substantially all of its assets, merges or otherwise engages in a combination
with the Fund, distribution expenses originally incurred in connection with the
distribution of the Acquired Fund's shares. Service Expenses under the Plans
include payments made to, or on account of, account executives of selected
broker-dealers (including affiliates of the Distributor) and others who furnish
personal and shareholder account maintenance services to shareholders of the
relevant class of the Fund.
During the fiscal year ended December 31, 1994, total payments made by
the
28
<PAGE> 203
Fund under the former Class A Rule 12b-1 plan to the former distributor
amounted to $405,172, which represented payments for service fees. During the
period from December 22, 1994 to December 31, 1994, payment under the Class A
Plan was made to the Distributor.
During the fiscal year ended December 31, 1994, total payments made by
the Fund under the former Class B Rule 12b-1 plan to the former distributor
amounted to $709,198 of which:
** (1) $118,200 represented service fees which were comprised of
$93,054 for distribution and/or administrative services
provided by the Fund's former distributor and $25,146 for
service fees paid to broker/dealers.
(2) $590,998 represented as the total of distribution fees paid to
the former distributor which are comprised of:
a) $249,768 for dealer commission payments;
b) $62,442 for underwriting fees; and
c) $278,788 for interest or the carrying charges.
For the fiscal year ended December 31, 1994, the former distributor
received $302,402 in contingent deferred sales charges from redemption of the
Fund's Class B shares. For the period from December 22, 1994 to December 31,
1994, the Distributor received fees under the Class B Plan and contingent
deferred sales charges from redemptions of Class B shares.
Each of the Plans provides that it will continue in effect only as
long as its continuance is approved at least annually by a majority of both the
Trustees and the Independent Trustees. Each of the Plans provides that it may
be terminated (a) at any time by vote of a majority of the Trustees, a majority
of the Independent Trustees, or a majority of the respective Class' outstanding
voting securities or (b) by the Distributor on 60 days' notice in writing to
the Fund. Each of the Plans further provides that it may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of
the Fund which has voting rights with respect to the Plan. Each of the Plans
provides that no material amendment to the Plan will, in any event, be
effective unless it is approved by a majority vote of the Trustees and the
Independent Trustees of the Fund. The holders of Class A Shares and Class B
Shares have exclusive voting rights with respect to the Plan applicable to
their respective class of shares. The Board of Trustees, including the
Trustees who are not interested in the Fund and have no direct or indirect
interest in the Plans, has determined that, in their judgment, there is a
reasonable likelihood that the Plans will benefit the holders of the applicable
class of shares of the Fund.
Information regarding the services rendered under the Plans and the
Distribution Agreement and the amounts paid therefore by the respective Class
of the Fund are provided to, and reviewed by, the Board of Trustees on a
quarterly basis. In its quarterly
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<PAGE> 204
review, the Board of Trustees considers the continued appropriateness of the
Plans and the Distribution Agreement and the level of compensation provided
therein.
REDEMPTION AND REPURCHASE OF SHARES
CONTINGENT DEFERRED SALES CHARGE. Investments in Class B shares are
purchased at net asset value per share without the imposition of a sales charge
so that the Fund will receive the full amount of the purchase payment. Class B
Shares which are redeemed within six years of purchase will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the Class A
and Class B Prospectus as a percentage of the dollar amount subject to the
CDSC. The charge will be assessed on an amount equal to the lesser of the
current market value or the original purchase cost of the Class B Shares being
redeemed. Accordingly, no CDSC will be imposed on increases in account value
above the initial purchase prices, including Class B Shares derived from
reinvestment of dividends or capital gains distributions. Certain redemptions
of Class A Shares may be subject to a CDSC, as described in the Prospectus.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B Shares until the
time of redemption of such shares. Solely for purposes of determining the
number of years from the time of any payment for the purchases of shares, all
payments during a month will be aggregated and deemed to have been made on the
last day of the month.
Proceeds from the CDSC are paid to the Distributor and are used in
whole or in part by the Distributor to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B Shares, such as the payment of compensation to select Selling Brokers
for selling Class B Shares. The combination of the CDSC and the distribution
and service fees facilitates the ability of the Fund to sell the Class B Shares
without a sales charge being deducted at the time of the purchase. See the
Class A and Class B Prospectus for additional information regarding the CDSC.
SPECIAL REDEMPTIONS. Although it is the Fund's present policy to make
payment of redemption proceeds in cash, if the Board of Trustees determines
that a material adverse effect would otherwise be experienced by remaining
investors, redemption proceeds may be paid in whole or in part by a
distribution in kind of securities from the Fund in conformity with rules of
the Securities and Exchange Commission, valuing such securities in the same
manner they are valued in determining NAV, and selecting the securities in such
manner as the Board may deem fair and equitable. If such a distribution
occurs, investors receiving securities and selling them before their maturity
could receive less than the redemption value of such securities and, in
addition, could incur certain transaction costs. Such a redemption is not as
liquid as a redemption paid in cash or federal funds. The Fund has elected to
be governed by Rule 18f-1 under the 1940 Act, pursuant to which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund during any 90 day period for any one account.
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<PAGE> 205
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE. As described more fully in the Prospectus, the
Fund permits exchanges of shares of any class of the Fund for shares of the
same class in any other John Hancock fund offering that class.
SYSTEMATIC WITHDRAWAL PLAN. As described briefly in the Class A and
Class B Prospectus, the Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares. Since the redemption price of Fund shares may be
more or less than the shareholder's cost, depending upon the market value of
the securities owned by the Fund at the time of redemption, the distribution of
cash pursuant to this plan may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional Class A or
Class B Shares of the Fund could be disadvantageous to a shareholder because of
the initial sales charge payable on such purchases of Class A Shares and the
CDSC imposed on redemptions of Class B Shares and because redemptions are
taxable events. Therefore, a shareholder should not purchase Fund shares at
the same time as a Systematic Withdrawal Plan is in effect. The Fund reserves
the right to modify or discontinue the Systematic Withdrawal Plan of any
shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Fund Services.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM ("MAAP"). This program is
explained fully in the Fund's Class A and Class B Prospectus and the Account
Privileges Application. The program, as it relates to automatic investment
checks, is subject to the following conditions;
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice
if any investment is not honored by the shareholder's bank. The bank shall be
under no obligation to notify the shareholder as to the non-payment of any
check.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Fund shares
may, within 120 days after the date of redemption, reinvest without payment of
a sales charge any part of the redemption proceeds in shares of the same class
of the Fund or another John Hancock mutual fund, subject to the minimum
investment limit in that fund. The proceeds from the redemption of Class A
Shares may be reinvested at net asset value without paying a sales charge in
Class A Shares of the Fund or in Class A Shares of
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another John Hancock mutual fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from that redemption at net asset value
in additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the
CDSC. The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include
the holding period of the redeemed shares. The Fund may modify or terminate
the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised,
and any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Dividends, Distributions and Tax Status."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's
shares, the following procedures are utilized wherever applicable. Debt
investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of the security may be determined in good faith in accordance with
procedures approved by the Trustees. The Fund will not price its securities
on the following national holidays: New Year's Day; President's Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and
Christmas Day.
TAX STATUS
The Fund has qualified and elected to be treated as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to continue to so qualify in the future. As
such and by complying with the applicable provisions of the Code regarding the
sources of its income, the timing of its distributions, and the diversification
of its assets, the Fund will not be subject to Federal income tax on taxable
income (including net short-term and long-term capital gains from the
disposition of portfolio securities or the right to when-issued securities
prior to issuance, or from the lapse, exercise, delivery under or closing out
of options or futures contracts, income from repurchase agreements and other
taxable securities, income attributable to accrued market discount, income from
securities lending, and a portion of the discount from certain stripped
tax-exempt obligations or their coupons) which is distributed to shareholders
at least annually in accordance with the timing requirements of the Code.
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<PAGE> 207
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements.
The Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and
profits ("E&P"), as computed for Federal income tax purposes, will be taxable
as described in the Fund's Prospectus whether taken in shares or in cash.
Amounts that are not allowable as a deduction in computing taxable income,
including expenses associated with earning tax-exempt interest income, do not
reduce current E&P for this purpose. Distributions, if any, in excess of E&P
will constitute a return of capital, which will first reduce an investor's tax
basis in Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
The Fund's distributions of tax-exempt interest ("exempt-interest
dividends") timely designated as such will be treated as tax-exempt interest
under the Code, provided that the Fund qualifies as a regulated investment
company and at least 50% of the value of its assets at the end of each quarter
of its taxable year is invested in tax-exempt obligations. Shareholders are
required to report their receipt of tax-exempt interest, including such
distributions, on their Federal income tax returns. The portion of the Fund's
distributions designated as exempt-interest dividends may differ from the
actual percentage that its tax-exempt income comprised of its total income
during the period of any particular shareholder's investment. The Fund will
report to shareholders the amount designated as exempt-interest dividends for
each year.
Interest income from certain types of tax-exempt bonds that are
private activity bonds in which the Fund may invest is treated as an item of
tax preference for purposes of the Federal alternative minimum tax. To the
extent that the Fund invests in these types of tax-exempt bonds, shareholders
will be required to treat as an item of tax preference for Federal alternative
minimum purposes that part of the Fund's exempt-interest dividends which is
derived from interest on these tax-exempt bonds. Exempt- interest dividends
derived from interest income from all tax-exempt bonds may be included in
corporate "adjusted current earnings" for purposes of computing the alternative
minimum tax liability, if any, of corporate shareholders of the Fund.
The amount of the Fund's net short-term and long-term capital gains,
if any, in any given year will vary depending upon the Adviser's current
investment strategy and whether the Adviser believes it to be in the best
interest of the Fund to dispose of portfolio securities or enter into options
or futures transactions that will generate capital gains. At the time of an
investor's purchase of Fund shares, a portion of the purchase price is often
attributable to realized or unrealized appreciation in the Fund's portfolio
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<PAGE> 208
or, less frequently, to undistributed taxable income of the Fund. Consequently,
subsequent distributions from such appreciation or income may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital
gain or loss if the shares are capital assets in the shareholder's hands and
will be long-term or short-term, depending upon the shareholder's tax holding
period for the shares. A sales charge paid in purchasing Class A shares of the
Fund cannot be taken into account for purposes of determining gain or loss on
the redemption or exchange of such shares within 90 days after their purchase
to the extent shares of the Fund or another John Hancock Fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Such disregarded load will result in an increase in the
shareholder's tax basis in the shares subsequently acquired. Also, any loss
realized on a redemption or exchange will be disallowed to the extent the
shares disposed of are replaced with other shares of the Fund within a period
of 61 days beginning 30 days before and ending 30 days after the shares are
disposed of, such as pursuant to an election to reinvest dividends in
additional shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be disallowed
to the extent of all exempt-interest dividends paid with respect to such shares
and, if not thus disallowed, will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain with
respect to such shares.
Although its present intention is to distribute all net short-term and
long-term capital gains, if any, the Fund reserves the right to retain and
reinvest all or any portion of its "net capital gain," which is the excess, as
computed for Federal income tax purposes, of net long-term capital gain over
net short-term capital loss in any year. The Fund will not in any event
distribute net capital gain realized in any year to the extent that a capital
loss is carried forward from prior years against such gain. To the extent such
excess was retained and not exhausted by the carryforward of prior years'
capital losses, it would be subject to Federal income tax in the hands of the
Fund. Each shareholder would be treated for Federal income tax purposes as if
the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain income in his return for his taxable year in which the last day of
the Fund's taxable year falls, (b) be entitled either to a tax credit on his
return for, or to a refund of, his pro rata share of the taxes paid by the
Fund, and (c) be entitled to increase the adjusted tax basis for his shares in
the Fund by the difference between his pro rata share of such excess and his
pro rata share of such taxes.
For Federal income tax purposes, the Fund is generally permitted to
carry forward a net capital loss in any year to offset its net capital gains,
if any, during the eight years following the year of the loss. To the extent
subsequent capital gains are offset by such losses, they would not result in
Federal income tax liability to the Fund and, as noted
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above, would not be distributed as such to shareholders. The Fund has $268,000
of capital loss carry forwards, which expire in 2002, available to offset
future capital gains.
Interest on indebtedness incurred by a shareholder to purchase or
carry shares of the Fund will not be deductible for Federal income tax purposes
to the extent it is deemed related to exempt-interest dividends paid by the
Fund. Pursuant to published guidelines, the Internal Revenue Service may deem
indebtedness to have been incurred for the purpose of purchasing or carrying
shares of the Fund even though the borrowed funds may not be directly traceable
to the purchase of shares.
Dividends paid by the Fund to its corporate shareholders will not
qualify for the corporate dividends received deduction in their hands.
If the Fund invests in zero coupon securities or, in general, any
other securities with original issue discount (or with market discount if the
Fund elects to include accrued market discount in income currently), the Fund
must accrue income on such investments prior to the receipt of the
corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Code and avoid Federal income and excise taxes. Therefore, the Fund may have
to dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may
cause the Fund to recognize gains or losses from marking to market even though
its positions have not been sold or terminated and affect the character as
long-term or short-term and timing of some capital gains and losses realized by
the Fund. Also, certain of the Fund's losses on its transactions involving
options or futures contracts and/or offsetting portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's gains. These transactions may therefore affect the amount, timing and
character of the Fund's distributions to shareholders. Certain of the
applicable tax rules may be modified if the Fund is eligible and chooses to
make one or more of certain tax elections that may be available. The Fund will
take into account the special tax rules (including consideration of available
elections) applicable to options and futures contracts in order to minimize any
potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies,
and financial institutions. Dividends, capital gain distributions, and
ownership of or gains realized on the redemption (including an exchange) of
Fund shares may also be subject to state and local taxes. Shareholders
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<PAGE> 210
should consult their own tax advisers as to the Federal, state or local tax
consequences of ownership of shares of, and receipt of distributions from, the
Fund in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in the Fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above.
These investors may be subject to nonresident alien withholding tax at the rate
of 30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from the Fund and, unless an effective IRS Form W-8 or
authorized substitute is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company
under the Code, it will also not be required to pay any Massachusetts income
tax.
The following discussion assumes that the Fund will be qualified as a
regulated investment company under subchapter M of the Code and will be
qualified thereunder to pay exempt interest dividends.
Individual shareholders of the Fund who are subject to California
personal income taxation will not be required to include in their California
gross income that portion of their federal exempt-interest dividends which the
Fund clearly and accurately identifies as directly attributable to interest
earned on obligations the interest on which is exempt from California personal
income taxation, provided that at least 50 percent of the value of the Fund's
total assets consists of such obligations. Distributions to individual
shareholders derived from interest on Tax-Exempt Securities issued by
governmental authorities in states other than California and short-term capital
gains will be taxed as dividends for purposes of California personal income
taxation. The Fund's long-term capital gains for Federal income tax purposes
that are distributed to the shareholders will be taxed as long- term capital
gains to individual shareholders of the Fund for purposes of California
personal income taxation. Gain or loss, if any, resulting from a sale or
redemption of shares will be recognized in the year of the sale or redemption.
Present California law taxes both long-term and short-term capital gains at the
rates applicable to ordinary income. Interest on indebtedness incurred or
continued by a shareholder in connection with the purchase of shares of the
Fund will not be deductible for California personal income tax purposes.
Generally, corporate shareholders of the Fund subject to the
California franchise tax will be required to include any gain on a sale or
redemption of shares and all distributions of exempt interest, capital gains
and other taxable income, if any, as income subject to such tax.
The Fund will not be subject to California franchise or corporate
income tax on interest income or net capital gain distributed to the
shareholders.
Shares of the Fund will be exempt from local property taxes in
California.
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Shares of the Fund will not be excludable from the taxable estates of
deceased California resident shareholders for purposes of the California estate
and generation skipping taxes. California estate and generation skipping taxes
are creditable against the corresponding Federal taxes.
The foregoing is a general, abbreviated summary of certain of the
provisions of California law presently in effect as it directly governs the
taxation of the shareholders of the Fund. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive with respect to the Fund's transactions. Shareholders are advised
to consult with their own tax advisers for more detailed information concerning
California tax matters.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and
the allocation of brokerage commissions are made by the Investment Adviser and
officers of the Fund pursuant to recommendations made by an investment
committee of the Investment Adviser, which consists of officers and directors
of the Investment Adviser and affiliates and officers and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities
are placed in a manner which, in the opinion of the officers of the Fund, will
offer the best price and market for the execution of each such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer and transactions with dealers serving as market
makers reflect a "spread." Investments in debt securities are generally traded
on a net basis through dealers acting for their own account as principals and
not as brokers; no brokerage commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing
primary policy, the Rules of Fair Practice of the NASD and other policies that
the Trustees may determine, the Investment Adviser may consider sales of shares
of the Fund as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research
information and to a lesser extent statistical assistance furnished to the
Investment Adviser of the Fund, and their value and expected contribution to
the performance of the Fund. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Investment
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<PAGE> 212
Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Investment Adviser. The research information
and statistical assistance furnished by brokers and dealers may benefit the
Life Company or other advisory clients of the Investment Adviser, and
conversely, brokerage commissions and spreads paid by other advisory clients of
the Investment Adviser may result in research information and statistical
assistance beneficial to the Fund. The Fund will make no commitments to
allocate portfolio transactions upon any prescribed basis. While the Fund's
officers will be primarily responsible for the allocation of the Fund's
brokerage business, their policies and practices in this regard must be
consistent with the foregoing and will at all times be subject to review by the
Trustees. For the fiscal years ended December 31, 1994, 1993 and 1992, no
negotiated brokerage commissions were paid on portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Fund may pay to a broker which provides brokerage and research services to
the Fund an amount of disclosed commission in excess of the commission which
another broker would have charged for effecting that transaction. This
practice is subject to a good faith determination by the Trustees that the
price is reasonable in light of the services provided and to policies that the
Trustees may adopt from time to time. During the fiscal year ended December
31, 1994, the Fund did not pay commissions as compensation to any brokers for
research services such as industry, economic and company reviews and
evaluations of securities.
The Investment Adviser's indirect parent, the Life Company, is the
indirect sole shareholder of John Hancock Freedom Securities Corporation and
its subsidiaries, three of which, Tucker Anthony Incorporated ("Tucker
Anthony") John Hancock Distributors, Inc. ("John Hancock Distributors") and
Sutro & Company, Inc. ("Sutro"), are broker-dealers ("Affiliated Brokers").
Pursuant to procedures determined by the Trustees and consistent with the above
policy of obtaining best net results, the Fund may execute portfolio
transactions with or through Tucker Anthony, Sutro or John Hancock
Distributors. During the year ended December 31, 1994, the Fund did not
execute any portfolio transactions with then affiliated brokers.
Any of the Affiliated Brokers may act as broker for the Fund on
exchange transactions, subject, however, to the general policy of the Fund set
forth above and the procedures adopted by the Trustees pursuant to the 1940
Act. Commissions paid to an Affiliated Broker must be at least as favorable as
those which the Trustees believe to be contemporaneously charged by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold. A transaction would not be placed with an Affiliated
Broker if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage firm, and
any customers of the Affiliated Broker not comparable to the Fund as determined
by a majority of the Trustees who are not interested persons (as defined in the
1940 Act) of the Fund, the Investment Adviser or the Affiliated Brokers.
Because the Investment Adviser, which is affiliated with the Affiliated
Brokers, has, as an investment adviser to the Fund, the obligation to provide
investment management services, which includes elements of research and related
investment skills, such research and related skills will not be used by the
Affiliated Brokers as a basis for negotiating commissions at a rate higher than
that determined in accordance with the above criteria. The Fund will not
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effect principal transactions with Affiliated Brokers.
The Fund's portfolio turnover rates for the fiscal years ended
December 31, 1993 and 1994 were 51% and 62%, respectively.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor
Services a monthly transfer agent fee of $19 per account for the Class A Shares
and $22.50 per account for the Class B Shares, plus out-of-pocket expenses.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116,
has been selected as the independent auditors of the Fund. The financial
statements of the Fund included in the Prospectus and this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
indicated in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
CUSTODY OF PORTFOLIO
Investor Bank and Trust ("IBT") 24 Federal Street, Boston,
Massachusetts, serves as custodian of the cash and investment securities of the
Fund. IBT is also responsible for, among other things, receipt and delivery of
the Fund's investment securities in accordance with procedures and conditions
specified in the custody agreement.
ADDITIONAL INFORMATION
ORGANIZATION. The Fund is organized as a Massachusetts business trust
under the laws of the Commonwealth of Massachusetts pursuant to a Declaration
of Trust dated October 17, 1989.
SHARES OF THE FUND. Ownership of the Fund is represented by
transferable shares of beneficial interest. The Declaration of Trust permits
the Trustees to create an unlimited number of series and classes of shares of
the Fund and, with respect to each series and class, to issue an unlimited
number of full or fractional shares and to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests of the Fund.
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Each share of each series or class of the Fund represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Fund is separate
and distinct. All consideration received for the sales of shares of a
particular series or class of the Fund, all assets in which such consideration
is invested and all income, earnings and profits derived from such investments
will be allocated to and belong to that series or class. As such, each such
share is entitled to dividends and distributions out of the net income
belonging to that series or class as declared by the Trustees. Shares of the
Fund have a par value of $0.01 per share. The assets of each series are
segregated on the Fund's books and are charged with the liabilities of that
series and with a share of the Fund's general liabilities. The Trustees
determine those assets and liabilities deemed to be general assets or
liabilities of the Fund, and these items are allocated among each series in
proportion to the relative total net assets of each series. In the unlikely
event that the liabilities allocable to a series exceed the assets of that
series, all or a portion of such liabilities may have to be borne by the other
series.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional classes
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future
regulations or other unforeseen circumstances). As of the date of this
Statement of Additional Information, the Trustees have authorized the issuance
of two classes of shares of the Fund designated as Class A and Class B. Class
A and Class B Shares of the Fund represent an equal proportionate interest in
the aggregate net asset values attributable to that class of the Fund. Holders
of Class A Shares and Class B Shares each have certain exclusive voting rights
on matters relating to the Class A Plan and the Class B Plan, respectively.
The different classes of the Fund may bear different expenses relating to the
cost of holding shareholder meetings necessitated by the exclusive voting
rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except for differences caused by the fact
that (i) Class B Shares will pay higher distribution and service fees than
Class A Shares and (ii) each of Class A Shares and Class B Shares will bear any
class expenses properly allocable to such class of shares, subject to the
conditions set forth in a private letter ruling that the Fund has received from
the Internal Revenue Service relating to its multiple-class structure.
Similarly, the net asset value per share may vary depending whether Class A
Shares or Class B Shares are purchased.
VOTING RIGHTS. Shareholders are entitled to a full vote for each full
share held. The Trustees themselves have the power to alter the number and the
terms of office of Trustees, and they may at any time lengthen their own terms
or make their terms of unlimited duration (subject to certain removal
procedures) and appoint their own successors, provided that at all times at
least a majority of the Trustees have been elected by shareholders. The voting
rights of shareholders are not cumulative, so that holders of more than 50
percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to
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elect any Trustees. Although the Fund need not hold annual meetings of
shareholders, the trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Declaration of
Trust. Also, a shareholder's meeting must be called if so requested in writing
by the holders of record of 10% or more of the outstanding shares of the Fund.
In addition, the Trustees may be removed by the action of the holders of record
of two-thirds or more of the outstanding shares.
SHAREHOLDER LIABILITY. The Declaration of Trust provides that no
Trustee, officer, employee or agent of the Fund is liable to the Fund or to a
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability
may arise from his or its own bad faith, willful misfeasance, gross negligence
or reckless disregard of his duties. It also provides that all third persons
shall look solely to the Fund's property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
As a Massachusetts business trust, the Fund is not required to issue
share certificates. The Fund shall continue without limitation of time subject
to the provisions in the Declaration of Trust concerning termination by action
of the shareholders.
REPORTS TO SHAREHOLDERS. Shareholders of the Fund will receive annual
and semi-annual reports showing diversification of investments, securities
owned and other information regarding the Fund's activities. The financial
statements of the Fund are audited at least once a year by the Fund's
independent auditors.
REGISTRATION STATEMENT. This Statement of Additional Information and
the Prospectus do not contain all of the information set forth in the Fund's
Registration Statement filed with the Securities and Exchange Commission. The
complete Registration Statement may be obtained from the Securities and
Exchange Commission upon payment of the fee prescribed by the rules and
regulations of the Commission.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1994, the annualized yields
of the Fund's Class A Shares and Class B Shares were 6.16% and 5.70%,
respectively (6.01% and 5.55%, respectively, without taking into account the
expense limitation arrangements). As of December 31, 1994 the average annual
total returns of the Class A Shares of the Fund for the one year period and
since inception on December 29, 1989 were -13.61% and 4.99%, respectively As
of December 31, 1994, the average annual returns for the Fund's Class B Shares
for the one year period and since inception December 31, 1991 were -14.99% and
2.27%. Without taking into account the expense limitation arrangements, the
foregoing total return performance would have been lower.
The Fund's yield is computed by dividing net investment income per
share determined for a 30-day period by the maximum offering price per share
(which includes
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the full sales charge) on the last day of the period, according to the
following standard formula:
Yield = 2 [ (a-b + 1)6 -1 ]
---
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the
period (NAV where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Fund which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at the maximum federal and California tax
rate (42.4%) for the 30-day period ended December 31, 1994 were 10.69% and
9.90%, respectively.
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
P (1+T)n = ERV
Where:
P= a hypothetical initial investment of $1,000.
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the 1-year and life-of-fund
periods.
In the case of Class A Shares or Class B Shares, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC is applied at the end of the period. This calculation also assumes that
all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during
the period stated by the maximum offering price or net asset value at the end
of the period.
In addition to average annual total returns, the Fund may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as
a percentage or as a dollar
42
<PAGE> 217
amount, and may be calculated for a single investment, a series of investments,
and/or a series of redemptions, over any time period. Total returns may be
quoted with or without taking the Fund's maximum sales charge on Class A Shares
or the CDSC on Class B Shares into account. Excluding the Fund's sales charge
on Class A Shares and the CDSC on Class B Shares from a total return
calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's
yield and total return will be compared to indices of mutual funds and bank
deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed
Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on approximately 1,700 fixed income mutual
funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C.
Towers are also used for comparison purposes, as well as the Russell and
Wilshire Indices. The Fund may also cite Morningstar Mutual Values, an
independent mutual fund information service which ranks mutual funds. The
Fund's promotional and sales literature may make reference to the Fund's
"beta." Beta is a reflection of the market-related risk of the Fund by showing
how responsive the fund is to the market.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
also be utilized.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function
of many factors including its earnings, expenses and number of outstanding
shares. Fluctuating market conditions; purchases, sales and maturities of
portfolio securities; sales and redemptions of shares of beneficial interest;
and changes in operating expenses are all examples of items that can increase
or decrease the Fund's performance.
ADDITIONAL PERFORMANCE INFORMATION. The Fund may use comparative
performance information from certain industry research materials and/or
published in various periodicals. The characteristics of the investments in
such comparisons may be different from those investments of the Fund's
portfolio. In addition, the formula used to calculate the performance
statistics of such investments may not be identical to the formula used by the
Fund to calculate its performance figures. From time to time, advertisements
or information for the Fund may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund. Such advertisements or
information may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail in the communication.
The Fund may from time to time advertise its comparative performance
as measured or refer to results published by various periodicals including, but
not limited to, Lipper Analytical Services, Inc. Barron's, "The Wall Street
Journal", "New York
43
<PAGE> 218
Times", Weisenberger Investment Companies Service, Donoghue's Money Fund
Report, Stanger's Investment Advisor, Financial Planning, Money, Fortune,
Personal Finance, Muni Week, Institutional Investor, Business Week, Financial
World and Forbes. In addition, the Fund may from time to time advertise its
performance relative to certain indexes and benchmark investments, including:
(a) the Shearson Lehman Municipal Bond Index, (b) Bond Buyer 25 Review Bond
Index, (c) the Consumer Price Index, and (d) taxable investments such as
certificates of deposit, money market deposit accounts, checking accounts,
savings accounts, money market mutual funds.
The composition of the investments in such indexes and the
characteristics of such benchmark investments are not identical to, and in some
cases are very different from, those of the Fund's portfolio. These indexes
and averages are generally unmanaged and the items included in the calculations
of such indexes and averages may not be identical to the formulas used by the
Fund to calculate its performance figures.
44
<PAGE> 219
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ---------- -----------
<S> <C> <C>
LONG-TERM MUNICIPAL
OBLIGATIONS-97.01%
COMMUNITY
FACILITIES-12.62%
Capistrano Unified School
District Community
Facilities District Bonds
7.000% due 09/01/18...................... $ 1,500,000 $ 1,331,250
7.500% due 09/01/07...................... 3,500,000 3,246,250
8.375% due 10/01/20...................... 3,000,000 3,041,250
Fontana Special Tax
Community Facilities
District Bonds
8.375% due 04/01/11...................... 10,000,000 8,262,500
8.400% due 04/01/15...................... 1,000,000 823,750
Fresno Joint Powers
Financing Authority
Revenue Refunding Bonds
6.550% due 09/02/12...................... 2,000,000 1,812,500
Industry Urban Development
Agency Bonds
6.900% due 11/01/16...................... 1,020,000 975,375
7.375% with various
maturities to 05/01/15................ 1,145,000 1,187,937
Los Alamitos Unified
School District Special
Tax Community Facilities
District Bonds
7.150% due 08/15/21...................... 6,005,000 5,359,463
Los Angeles County
Improvement Bonds
8.375% due 09/02/18...................... 3,865,000 3,947,131
Pleasanton Joint Power
Financing Authority
Revenue Bonds
6.600% due 09/02/08...................... 2,940,000 2,730,525
Sacramento Unified School
District Special Tax
Community Facilities
District Bonds
7.300% due 09/01/13...................... 760,000 779,000
Saddleback Valley Unified
School District
Community Facilities
District Bonds
7.750% due 09/01/16...................... 3,200,000 3,124,000
Santa Clarita Community
Facilities District
Special Tax Bonds
7.450% due 11/15/10...................... 3,600,000 3,636,000
-----------
40,256,931
HEALTH-12.92%
California Health Facilities
Financing Authority
Revenue Bonds
5.600% due 05/01/33...................... 3,800,000 2,987,750
5.800% due 12/01/18...................... 3,140,000 2,633,675
6.250% due 07/01/12...................... 1,135,000 1,037,106
7.500% due 04/01/22...................... 2,000,000 2,020,000
California Statewide
Community Development
Authority Revenue
Certificates of
Participation
5.500% due 07/01/23...................... 6,000,000 4,915,000
5.600% due 11/15/17...................... 2,435,000 1,996,700
6.200% due 08/01/12...................... 1,250,000 1,129,687
6.250% due 08/01/22...................... 2,590,000 2,263,012
6.500% due 08/01/22...................... 15,750,000 13,978,125
6.700% due 05/01/11...................... 1,250,000 1,200,000
6.750% due 12/01/21...................... 7,500,000 7,040,625
------------
41,201,680
HOSPITALS-7.93%
Arcadia Hospital
Revenue Bonds
6.625% due 11/15/22...................... 1,205,000 1,051,363
Bakersfield Memorial
Hospital Revenue Bonds
6.500% due 01/01/22...................... 2,000,000 1,792,500
</TABLE>
45
<PAGE> 220
STATEMENT OF NET ASSETS
John HancocK California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
Covina Hospital Revenue
Certificates of
Participation
7.000% due 03/01/17...................... 925,000 857,937
Duarte City of Hope
Medical Center
Certificates of
Participation
6.250% due 04/01/23...................... 13,900,000 11,571,750
Rancho Mirage Joint Powers
Financing Authority
Certificates of
Participation
7.000% due 03/01/22...................... 4,500,000 4,201,875
San Bernardino County
Certificates of
Participation
5.500% due 08/01/17...................... 7,500,000 5,812,500
-----------
25,287,925
HOUSING--0.57%
California Housing Finance
Agency Revenue Bonds
7.375% due 08/01/17...................... 335,000 341,700
Upland Housing Authority
Revenue Bonds
7.500% due 07/01/03...................... 190,000 190,238
7.850% due 07/01/20...................... 1,280,000 1,294,400
-----------
1,826,338
INDUSTRIAL
DEVELOPMENT--0.30%
ABAG Finance Authority
for Nonprofit Corps.
Certificates of
Participation
6.800% due 10/01/11...................... 1,000,000 962,500
MORTGAGE INSURED
BONDS--1.38%
California Housing Finance
Agency Home Mortgage
Revenue Refunding Bonds
7.250% due 08/01/17...................... 3,500,000 3,561,250
Southern California Home
Finance Authority Single
Family Mortgage Revenue
Bonds Series A
6.750% due 09/01/22...................... 850,000 835,125
-----------
4,396,375
MUNICIPAL UTILITY
DISTRICTS--0.92%
Sacramento Municipal
Utility District Electric
Revenue Bonds
5.750% due 05/15/22...................... 2,700,000 2,274,750
Southern California Public
Power Authority
Transmission Project
Revenue Bonds
5.500% due 07/01/20...................... 800,000 655,000
-----------
2,929,750
PUBLIC FACILITIES--21.03%
Anaheim Certificates of
Participation
6.870% due 07/16/23(A)................... 2,000,000 1,690,000
Anaheim Public Finance
Authority Electric Utility
Revenue Bonds
5.750% due 10/01/22..................... 2,750,000 2,354,688
California Public Capital
Improvements Financing
Authority Revenue Bonds
8.125% due 03/01/95...................... 230,000 230,862
</TABLE>
46
<PAGE> 221
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
California State Public
Works Board Lease
Revenue Bonds
5.000% due 12/01/19 .................... 7,795,000 6,021,638
6.700% due 10/01/17 .................... 1,500,000 1,428,750
Chula Vista Certificates of
Participation
6.000% with various
maturities to 09/01/12 ................. 1,700,000 1,506,875
Concord Joint Powers
Financing Authority
Lease Revenue Bonds
5.250% due 08/01/19 .................... 3,520,000 2,772,000
Cupertino Certificates of
Participation
5.750% due 01/01/16 .................... 2,500,000 2,137,500
Delano Certificates of
Participation
7.000% due 04/01/10 .................... 2,000,000 1,915,000
Encinitas Certificates of
Participation
6.750% due 12/01/11 .................... 1,300,000 1,270,750
Inglewood Certificates of
Participation
7.000% due 08/01/19 .................... 1,000,000 966,250
Los Angeles County
Certificates of Participation
6.250% due 07/01/03 .................... 2,000,000 1,920,000
6.500% due 07/01/08 .................... 4,000,000 3,735,000
Los Angeles County Disney
Parking Certificates of
Participation
6.500% due 03/01/23 .................... 2,000,000 1,820,000
Los Angeles County Public
Works Finance Authority
Revenue Bonds
6.000% due 10/01/15 ................... 3,750,000 3,375,000
Oceanside Certificates of
Participation
6.000% due 04/01/17 .................... 2,875,000 2,461,719
6.375% due 04/01/12 .................... 3,000,000 2,767,500
Orange County Certificates
of Participation
6.700% due 08/01/18 .................... 1,000,000 963,750
San Diego County
Certificates of
Participation
6.750% due 08/01/19 .................... 3,000,000 2,996,250
San Jose Financing
Authority Revenue Bonds
6.400% due 09/01/17 .................... 2,000,000 1,857,500
San Marcus Public Facilities
Authority Revenue
Refunding Bonds
6.200% due 08/01/22 .................... 5,000,000 4,156,250
San Mateo Joint Powers
Financing Authority
Lease Revenue
Refunding Bonds
5.000% due 07/01/21 .................... 1,815,000 1,393,012
5.125% due 07/01/18 .................... 2,500,000 1,978,125
Santa Ana Financing
Authority Lease
Revenue Bonds
6.250% with various
maturities to 07/01/24 ................. 11,790,000 11,041,550
Stanislaus County
Certificates of
Participation
7.550% due 04/01/18 .................... 2,295,000 2,283,525
Vallejo Certificates of
Participation
8.000% due 02/01/06 .................... 2,000,000 2,025,000
-----------
67,068,494
REDEVELOPMENT-
COMMERCIAL--1.22%
Azusa Redevelopment
Agency Tax
Allocation Bonds
7.000% due 08/01/22 .................. 2,000,000 1,875,000
</TABLE>
47
<PAGE> 222
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ---------- -----------
<S> <C> <C>
BRENTWOOD REDEVELOPMENT
Agency Tax
Allocation Bonds
7.700% due 11/01/08..................... 135,000 135,844
Richmond Joint Powers
Financing Authority
Revenue Bonds
7.700% due 10/01/10..................... 1,835,000 1,880,875
-----------
3,891,719
REDEVELOPMENT-
MIXED USE--15.94%
Avalon Community
Improvement Agency Tax
Allocation Bonds
6.400% due 08/01/22..................... 1,975,000 1,752,813
Bakersfield Central District
Development Agency Tax
Allocation Bonds
6.625% due 04/01/15..................... 4,000,000 3,665,000
Burbank Redevelopment
Agency Tax
Allocation Bonds
6.000% due 12/01/23..................... 2,750,000 2,296,250
Clearlake Redevelopment
Agency Tax
Allocation Bonds
6.400% due 10/01/23..................... 500,000 446,250
Concord Redevelopment
Agency Tax Allocation
General Obligation Bonds
5.750% due 07/01/10..................... 1,145,000 970,387
Davis City Redevelopment
Agency Tax
Allocation Bonds
7.000% due 09/01/24..................... 5,115,000 5,204,513
Huntington Park Public
Financing Authority
Revenue Bonds
7.600% due 09/01/18..................... 5,000,000 4,675,000
Inglewood Redevelopment
Agency Tax
Allocation Bonds
6.125% due 07/01/13..................... 1,000,000 873,750
Lincoln Redevelopment
Agency Tax Allocation
Revenue Bonds
7.650% due 08/01/17..................... 3,350,000 3,379,313
Merced Public Financing
Authority Revenue Bonds
5.500% due 12/01/15..................... 3,630,000 2,958,450
Orange County
Development Agency Tax
Allocation Bonds
6.125% due 09/01/23..................... 3,000,000 2,302,500
Orange Redevelopment
Agency Tax Allocation
Revenue Bonds
5.700% due 10/01/17..................... 3,000,000 2,478,750
Palm Springs Financing
Authority Revenue Bonds
6.400% due 09/01/17..................... 3,000,000 2,737,500
Pittsburg Redevelopment
Agency Tax
Allocation Bonds
7.400% due 08/15/20..................... 3,040,000 2,983,000
Pomona Public Financing
Authority Revenue
Refunding Bonds
5.750% due 02/01/20..................... 10,000,000 7,912,500
Santa Cruz County Public
Financing Authority
Revenue Bonds
6.200% due 09/01/23..................... 2,000,000 1,677,500
Suisun City Redevelopment
Agency Tax
Allocation Bonds
7.250% due 10/01/20..................... 425,000 460,594
</TABLE>
48
<PAGE> 223
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
Tracy Community
Development Agency Toll
Road Revenue Bonds
6.000% due 03/01/24...................... 5,000,000 4,056,250
-----------
50,830,320
SCHOOLS--5.97%
Beaumont Unified School
District Certificates of
Participation
7.700% due 01/01/21...................... 1,000,000 985,000
Cucamonga School District
Certificates of
Participation
7.600% due 12/01/15...................... 1,000,000 1,022,500
Elk Grove Unified School
District Special
Tax Bonds
7.125% due 12/01/24...................... 1,000,000 1,016,250
Perris Union High School
District Certificates of
Participation
5.900% due 09/01/23...................... 2,000,000 1,667,500
San Gabriel Valley School
Financing Authority
Revenue Refunding Bonds
5.500% due 02/01/19...................... 1,500,000 1,215,000
Saugus Unified School
District Certificates of
Participation
7.500% due 08/01/09...................... 700,000 733,250
Sierra Unified School
District Certificates of
Participation
6.000% due 03/01/12...................... 2,000,000 1,707,500
Simi Valley Unified School
District Certificates of
Participation
6.100% due 08/01/22...................... 3,000,000 2,737,500
University of California
Certificates of Participation
5.500% due 11/01/14...................... 2,000,000 1,642,500
5.600% due 11/01/20...................... 6,180,000 4,990,350
Victor Valley Unified School
District Certificates of
Participation
7.875% due 11/01/12...................... 1,255,000 1,316,181
-----------
19,033,531
TRANSPORTATION--1.09%
San Diego MTDB Authority
Lease Revenue Bonds
5.375% due 06/01/23...................... 2,500,000 2,050,000
San Joaquin Hills
Transportation Corridor
Agency Toll Road
Revenue Bonds
6.750% due 01/01/32...................... 1,750,000 1,448,125
-----------
3,498,125
WASTE--2.98%
California Pollution Control
Financing Authority
Pollution Control
Revenue Bonds
5.850% due 12/01/23...................... 500,000 419,375
California Pollution Control
Financing Authority
Solid Waste Disposal
Revenue Bonds
6.875% due 11/01/27...................... 2,000,000 1,882,500
Stanislaus Waste to Energy
Financing Agency
Revenue Bonds
7.625% due 01/01/10...................... 1,000,000 1,007,500
Vallejo Sanitation and Flood
Control District
Certificates of Participation
5.000% due 07/01/19...................... 8,000,000 6,190,000
-----------
9,499,375
</TABLE>
49
<PAGE> 224
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
WATER--12.14%
Apple Valley Water District
Improvement Bonds
7.875% due 09/02/11...................... 2,425,000 2,500,781
California Department of
Water Resources
Central Valley Project
Revenue Bonds
5.500% due 12/01/23...................... 6,000,000 4,942,500
Calleguas-Las Virgines
Public Financing
Authority Revenue Bonds
5.125% due 07/01/21...................... 4,500,000 3,493,125
Central Coast Water
Authority Revenue Bonds
6.600% due 10/01/22...................... 3,200,000 3,132,000
East Bay Municipal Utility
District Water System
Revenue Refunding Bonds
6.000% due 06/01/12...................... 1,000,000 930,000
Metropolitan Water
District Waterworks
Revenue Bonds
5.000% due 07/01/20...................... 7,500,000 5,784,375
5.500% due 07/01/19...................... 5,000,000 4,181,250
Orange Cove Irrigation
District Revenue
Certificates of Participation
7.000% due 02/01/15...................... 2,500,000 2,409,375
7.250% due 02/01/12...................... 2,000,000 2,000,000
San Bernardino Municipal
Water Department
Certificates of Participation
6.250% due 02/01/17...................... 2,510,000 2,365,675
Santa Barbara Water and
Sewer Certificates of
Participation
6.700% due 04/01/27...................... 2,000,000 1,957,500
Turlock Irrigation District
Certificates of
Participation
7.300% due 01/01/11...................... 4,165,000 4,165,000
Turlock Irrigation District
Revenue Refunding
Bonds Series A
5.750% due 01/01/18...................... 1,000,000 873,750
------------
38,735,331
------------
TOTAL LONG-TERM
MUNICIPAL OBLIGATIONS
(Cost $342,717,564).......................... 309,418,394
SHORT-TERM
OBLIGATIONS--0.88%
VARIABLE RATE REVENUE
BONDS--0.88%
INDUSTRIAL
DEVELOPMENT--0.88%
California Pollution Control
Financing Authority
Pollution Control Revenue
Bonds Series A
5.000% due 01/03/95(B)................... 2,800,000 2,808,941
------------
TOTAL SHORT-TERM
OBLIGATIONS
(Cost $2,808,941)............................ 2,808,941
------------
TOTAL INVESTMENTS--97.89%
(Cost $345,526,505).......................... 312,227,335
CASH AND OTHER ASSETS,
LESS LIABILITIES--2.11%...................... 6,720,818
------------
NET ASSETS, at value,
equivalent to $9.28 per
share for 26,034,286
Class A Shares ($.01 par
value) outstanding and
$9.28 per share for
8,339,105 Class B Shares
($.01 par value)
outstanding--100.00%....................... $318,948,153
============
</TABLE>
(A) Floating rate securities.
(B) Interest rate reset date.
See Notes to Financial Statements.
50
<PAGE> 225
STATEMENT OF OPERATIONS/STATEMENTS OF CHANGES NET ASSETS
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
- --------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest................................... $ 23,033,267
------------
Expenses
Management fees............................ $ 1,919,101
Distribution expenses
(see Note D)............................. 1,114,370
Transfer agent fees........................ 244,131
Administrative service fees................ 158,594
Custodian fees............................. 100,287
Audit and legal fees....................... 39,491
Registration fees.......................... 36,394
Trustees' fees and expenses................ 27,905
Insurance expense.......................... 25,872
Shareholder reports........................ 23,859
Organization costs......................... 4,619
Miscellaneous.............................. 20,155
Less: Expense
reimbursement............................ (506,921) 3,207,857
----------- ------------
Net Investment Income.................. 19,825,410
------------
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS
Net realized loss on
investments.............................. (4,180,216)
Net change in unrealized
depreciation of
investments.............................. (51,218,323)
------------
Net realized and unrealized
loss on investments.................. (55,398,539)
------------
Decrease in net assets
resulting from operations............ $(35,573,129)
====================================================================
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income...................... $ 19,825,410 $ 16,517,620
Net realized gain (loss) on
investments.............................. (4,180,216) 9,880,178
Net change in unrealized
appreciation
(depreciation) of
investments.............................. (51,218,323) 9,798,946
------------ ------------
Increase (decrease) in net
assets resulting from
operations............................... (35,573,129) 36,196,744
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income-
Class A.................................. (15,737,105) (14,358,309)
Class B.................................. (3,992,716) (2,149,913)
Net realized gain on
investments-
Class A.................................. - (8,029,591)
Class B.................................. - (1,848,387)
------------ ------------
Total distributions to
shareholders......................... (19,729,821) (26,386,200)
------------ ------------
SHARE TRANSACTIONS
Increase in shares
outstanding................................ 29,122,142 91,709,279
------------ ------------
Increase (decrease) in
net assets................................. (26,180,808) 101,519,823
NET ASSETS
Beginning of year.......................... 345,128,961 243,609,138
------------ ------------
End of year................................ $318,948,153 $345,128,961
============ ============
Undistributed Net
Investment Income........................ $ 127,227 $ 31,638
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE> 226
NOTES TO FINANCIAL STATEMENTS
John Hancock California Tax-Free Income Fund
December 31, 1994
NOTE A--
SIGNIFICANT ACCOUNTING POLICIES
John Hancock California Tax-Free Income Fund (the ``Fund''), formerly
Transamerica California Tax-Free Income Fund, is a diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended. On December 16, 1994, the shareholders of each of the mutual
funds managed by Transamerica Fund Management Company (TFMC) voted to approve
new Investment Advisory contracts with John Hancock Advisers, Inc. Each such
approval was subject to the acquisition of TFMC by The Berkeley Financial Group
(known beginning January 1, 1995 as John Hancock Funds), the parent company of
John Hancock Advisers, Inc. The acquisition became effective December 22, 1994.
The Fund's name change was also effective on this date.
The Fund offers two classes of shares to the public. Class A Shares
are subject to an initial sales charge of up to 4.75% and a 12b-1 distribution
plan. Class B Shares are subject to a contingent deferred sales charge and a
separate 12b-1 distribution plan. The following is a summary of significant
accounting policies consistently followed by the Fund.
(1) The Fund values its investments by using quotations provided by
market makers, estimates of market value, or values received from an
independent pricing service. Securities for which market quotations are not
readily available are valued at a fair value as determined in good faith by the
Fund's Board of Trustees. Short-term investments are valued at amortized cost
(original cost plus amortized discount or accrued interest).
(2) Security transactions are accounted for on the trade date. Interest
income is accrued daily. Debt premiums and original issue discounts are
amortized using the yield-to-maturity method. Discounts other than original
issue are not amortized. Realized gains and losses from security transactions
are determined on the basis of identified cost for both financial reporting and
federal income tax purposes.
(3) Income dividends are declared daily by the Fund and paid to
shareholders or reinvested at net asset value monthly. Other distributions are
recorded on the ex-dividend date and may be reinvested at net asset value.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
Distributions payable to shareholders at December 31, 1994 were $907,182.
(4) No provision for federal income taxes has been made since it is the
Fund's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code. At December 31, 1994, the Fund had a realized capital loss
carryforward of approximately $268,000, which will expire in 2002.
(5) The Fund reports custodian fees net of credits and charges
resulting from cash positions in the custodial accounts greater than or less
than the amounts required to settle portfolio transactions. For the year ended
December 31, 1994, these amounts were $11,967 and $26,382, respectively.
(6) On a daily basis, income, unrealized and realized gains and losses,
and expenses which are not class specific are allocated to each class based on
their respective relative net assets. Class specific expenses, such as
distribution expenses, are applied to the class to which they are attributed.
NOTE B--
MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
From January 1, 1994 through December 21, 1994, TFMC acted as the
Investment Adviser to the Fund. On December 22, 1994, John Hancock Advisers,
Inc., a wholly-owned subsidiary of John Hancock Funds, became Investment
Adviser following the approval of the Fund's shareholders. Throughout these
financial statement notes, TFMC and John Hancock Advisers, Inc. are referred to
collectively as the ``Investment Adviser'', as each acted in this capacity
during the time periods noted above. The Investment Adviser has a sub-advisory
agreement with, and pays a fee to, Transamerica Investment Services, Inc. (the
``Sub-Adviser''). TFMC was, prior to December 22, 1994, and the Sub-Adviser is
presently a subsidiary of Transamerica Corporation.
The Fund's management fee is payable monthly and is calculated based on
the monthly average daily net assets of the Fund at an annual rate of 0.55%. At
December 31, 1994, the management fee payable to the Investment Adviser was
$118,703.
The Investment Adviser also provided administrative services to the
Fund pursuant to an administrative service agreement. During the year ended
December 31, 1994, the Fund paid or accrued $109,540 to the Investment Adviser
for these services, of which $13,620 was payable at December 31, 1994.
The Investment Adviser voluntarily agreed to reimburse the Fund for all
normal operating expenses, excluding distribution expenses, in excess of 0.60%,
on an annual basis, of the Fund's average daily net assets through December 31,
1994. For the year ended December 31, 1994, the Investment Adviser reimbursed
the Fund $506,921 pursuant to this agreement.
52
<PAGE> 227
NOTES TO FINANCIAL STATEMENTS
Continued
John Hancock California Tax-Free Income Fund
During the year ended December 31, 1994, Transamerica Fund
Distributors, Inc., an affiliate of TFMC and principal underwriter of the Fund
through December 21, 1994, and John Hancock Funds, Inc., an affiliate of John
Hancock Advisers, Inc. and principal underwriter since December 22, 1994,
retained $126,490 as their portion of the commissions charged on sales of Class
A Shares of the Fund. Throughout these financial statement notes, Transamerica
Fund Distributors, Inc. and John Hancock Funds, Inc. are referred to
collectively as the ``Distributor'', as each acted in this capacity during the
time periods noted above. At December 31, 1994, receivables from and payable
to the Distributor for Fund share transactions were $182,622 and $725,576,
respectively.
The Fund paid no compensation directly to any officer. Certain officers
of the Fund are affiliated with the Investment Adviser.
During the year ended December 31, 1994, the Fund paid legal fees of
$6,000 to Baker & Botts. A partner with Baker & Botts was an officer of the
Fund until December 22, 1994.
NOTE C--COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the year ended December 31, 1994, purchases and sales of securities,
other than short-term obligations, aggregated $241,713,463 and $211,597,251,
respectively.
At December 31, 1994, receivables from brokers for securities sold were
$1,028,289. The identified cost of investments owned was the same for both
financial reporting and federal income tax purposes. At December 31, 1994, the
gross unrealized appreciation and gross unrealized depreciation of investments
for federal income tax purposes were $1,262,641 and $34,561,811, respectively.
NOTE D--PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized under separate distribution plans to finance activities related to
the distribution of its Class A and Class B Shares (the ``Class A Plan'' and
the ``Class B Plan,'' respectively). The distribution plans, together with the
initial sales charge on Class A Shares and the contingent deferred sales charge
on Class B Shares, comply with the regulations covering maximum sales charges
assessed by mutual funds distributed through securities dealers that are NASD
members.
The Class A Plan and the Class B Plan permit each class to make
payments to the Distributor up to 0.15% annually of average daily net assets
for certain distribution costs such as service fees paid to dealers, production
and distribution of prospectuses to prospective investors, services provided to
new and existing shareholders and other distribution related activities. During
the year ended December 31, 1994, the Fund made payments to the Distributor of
$405,172 or 0.15% for Class A and $118,200 or 0.15% for Class B, related to the
above activities.
The Class B Plan also permits Class B to reimburse the Distributor up
to 0.75% annually of average daily net assets for costs related to compensation
paid to securities dealers, in place of an initial sales charge to investors,
on the sale of Class B Shares. These costs are based upon a commission payment
charge of 5% of the value of Class B Shares sold (excluding shares acquired
through reinvestment), reduced by the amount of contingent deferred sales
charges (CDSC) that have been received by the Distributor on redemptions of
Class B Shares. These costs also include a charge of interest (carrying charge)
at an annual rate of 1% over the prevailing prime rate to the extent cumulative
commission payment charges, plus any previous carrying charges, less CDSC
received by the Distributor, have not been paid in full by the Fund. For the
year ended December 31, 1994, Class B reimbursed the Distributor $590,998 or
0.75% for such costs. For the year ended December 31, 1994, the Distributor
received $302,402 in CDSC.
At December 31, 1994, Class A had $96,343 and Class B had $77,295
payable to the Distributor pursuant to the above distribution plans.
NOTE E--ORGANIZATION
The Fund was organized as a Massachusetts business trust on October 17, 1989.
The Fund had no transactions between that date and December 31, 1989, the
date of the Fund's initial offering of shares to the public, other than the
sale at $10.00 per share (net asset value) of 10,000 shares to TFMC.
The organization expenses of the Fund have been deferred and are being
amortized over a period during which it is expected that a benefit will be
realized, but not longer than five years from the date of commencement of
operations.
53
<PAGE> 228
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE F--SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1994 1993
-------------------------- --------------------------
SHARES DOLLARS SHARES DOLLARS
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold-Class A........................................ 5,288,858 $ 54,343,070 6,222,367 $ 67,684,801
Shares sold-Class B........................................ 3,496,364 36,145,744 3,570,391 39,032,830
Shares issued in reinvestment of distributions-Class A..... 669,253 6,642,113 922,955 10,028,581
Shares issued in reinvestment of distributions-Class B..... 200,879 1,988,933 213,817 2,322,382
Shares redeemed-Class A.................................... (5,712,088) (56,313,131) (2,204,763) (24,012,146)
Shares redeemed-Class B.................................... (1,391,946) (13,684,587) (305,683) (3,347,169)
---------- ------------ ---------- ------------
Net increase in shares outstanding......................... 2,551,320 $ 29,122,142 8,419,084 $ 91,709,279
========== ============ ========== ============
</TABLE>
The components of net assets at December 31, 1994, are as follows:
<TABLE>
<S> <C>
Capital paid-in (unlimited number of shares authorized)................................................. $356,244,025
Undistributed net investment income..................................................................... 127,227
Accumulated net realized loss on investments............................................................ (4,123,929)
Net unrealized depreciation of investments.............................................................. (33,299,170)
------------
NET ASSETS.............................................................................................. $318,948,153
============
</TABLE>
54
<PAGE> 229
[LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
John Hancock California Tax-Free Income Fund
We have audited the accompanying statement of net assets of John Hancock
California Tax-Free Income Fund, formerly Transamerica California Tax-Free
Income Fund, as of December 31, 1994, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for each
of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlightsreferred to
above present fairly, in all material respects, the financial position of
John Hancock California Tax-Free Income Fund at December 31, 1994, the results
of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
February 3, 1995
55
<PAGE> 230
APPENDIX A
CORPORATE AND TAX-EXEMPT BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
AAA, AA, A AND BAA - Tax-exempt bonds rated Aaa are judged to be of
the "best quality." The rating of Aa is assigned to bonds that are of "high
quality by all standards," but long-term risks appear somewhat larger than Aaa
rated bonds. The Aaa and Aa rated bonds are generally known as "high grade
bonds." The foregoing ratings for tax-exempt bonds are rated conditionally.
Bonds for which the security depends upon the completion of some act or upon
the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals that begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Such parenthetical ratings denotes the probable credit
stature upon completion of construction or elimination of the basis of the
condition. Bonds rated A are considered as upper medium grade obligations.
Principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Bonds
rated Baa are considered a medium grade obligations; i.e., they are neither
highly protected or poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact, have speculative
characteristics as well.
STANDARD & POOR'S CORPORATION ("S&P")
AAA, AA, A AND BBB - Bonds rated AAA bear the highest rating assigned
to debt obligations and indicates an extremely strong capacity to pay principal
and interest. Bonds rated AA are considered "high grade," are only slightly
less marked than those of AAA ratings and have the second strongest capacity
for payment of debt service. Bonds rated A have a strong capacity to pay
principal and interest, although they are somewhat susceptible to the adverse
effects or changes in circumstances and economic conditions. The foregoing
ratings are sometimes followed by a "p" indicating that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the bonds being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. Although a provisional rating addresses
credit quality subsequent of completion of the project, it makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
Bonds rated BBB are regarded as having an adequate capacity to repay principal
and pay interest. Whereas they normally exhibit protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to repay principal and pay interest for bonds in this
category than for bonds in the A category.
1
<PAGE> 231
FITCH INVESTORS SERVICE ("FITCH")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment
grade and of the highest quality. The obligor has an extraordinary ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. Bonds rated AA are considered to be investment
grade and of high quality. The obligor's ability to pay interest and repay
principal, while very strong, is somewhat less than for AAA rated securities or
more subject to possible change over the term of the issue. Bonds rated A are
considered to be investment grade and of good quality. The obligor's ability
to pay interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings. Bonds rated BBB are considered to be investment
grade and of satisfactory quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to weaken this ability
than bonds with higher ratings.
TAX-EXEMPT NOTE RATINGS
MOODY'S - MIG-1 AND MIG-2. Notes rated MIG-1 are judged to be of the
best quality, enjoying strong protection from established cash flow or funds
for their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, though not as large as MIG-1.
S&P - SP-1 AND SP-2. SP-1 denotes a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal interest.
FITCH - FIN-1 AND FIN-2. Notes assigned FIN-1 are regarded as having
the strongest degree of assurance for timely payment. A plus symbol may be
used to indicate relative standing. Notes assigned FIN-2 reflect a degree of
assurance for timely payment only slightly less in degree than the highest
category.
CORPORATE AND TAX-EXEMPT COMMERICAL PAPER RATINGS
MOODY'S - Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Prime-1, indicates highest quality
repayment capacity of rated issue and Prime-2 indicates higher quality.
S&P - Commercial Paper ratings are a current assessment of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Issues rated A have the greatest capacity for a timely payment
and the designation 1, 2 and 3 indicates the relative degree of safety. Issues
rated "A-1+" are those with an "overwhelming degree of credit protection."
FITCH - Commercial Paper ratings reflect current appraisal of the
degree of assurance of timely payment. F-1 issues are regarded as having the
strongest degree of
2
<PAGE> 232
assurance for timely payment. (+) is used to designate the relative position
of an issuer within the rating category. F-2 issues reflect an assurance of
timely payment only slightly less in degree than the strongest issues. The
symbol (LOC) may follow either category and indicates that a letter of credit
issued by a commercial bank is attached to the commercial paper note.
OTHER CONSIDERATIONS - The ratings of S&P, Moody's, and Fitch
represent their respective opinions of the quality of the municipal securities
they undertake to rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, municipal
securities with the same maturity, coupon and ratings may have different yields
and municipal securities of the same maturity and coupon with different ratings
may have the same yield.
3
<PAGE> 233
The Annual Report of John Hancock California Tax-Free Income Fund dated
December 31, 1994 appears as Exhibit C to the Prospectus/Proxy Statement
included in this Registration Statement on Form N-14.
<PAGE> 234
Exhibit C
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994
Pro forma information is intended to provide shareholders of the John Hancock
California Tax-Free Income Fund (JHCTFI) and John Hancock Tax-Exempt Series
Fund California Portfolio (JHTESCA) with information about the impact of the
proposed merger by indicating how the merger might have affected information
had the merger been consummated as of December 31, 1993.
The pro forma combined statements of assets and liabilities and results of
operations as of December 31, 1994, have been prepared to reflect the
merger of JHCTFI and JHTESCA after giving effect to pro forma adjustments
described in the notes listed below.
(a) Issuance of JHCTFI Class A shares in exchange for all of the
outstanding Class A shares of JHTESCA.
(b) The investment advisory fee was adjusted to reflect the application of
the fee structure in effect for JHCTFI.
(c) Custodian fees were adjusted to reflect the application of the fee
structure in effect for JHCTFI during the year.
(d) The actual expenses incurred by JHFCTI and JHTESCA for various expenses
included on a pro forma basis were reduced to reflect the estimated
savings arising from the merger.
(e) It was assumed that pursuant to the Plan of Distribution under rule
12b-1 of the Investment Company Act of 1940, JHCTFI is to pay a
distribution/service fee at 0.15% and .90% of the combined average net
assets of the Class A and Class B shares, respectively.
(f) The transfer agent fee for Class A and Class B shares is the total of
the respective individual fund's transfer agent fees. The main criteria
in determining the transfer agent fees for a specific class is the
number of shareholder accounts.
<PAGE> 235
<TABLE>
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
PRO-FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<CAPTION>
JOHN HANCOCK JOHN HANCOCK
TAX-EXEMPT SERIES CALIFORNIA PRO
FUND TAX-FREE INCOME FORMA
CALIFORNIA PORTFOLIO FUND ADJUSTMENTS COMBINED
-------------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments at value $43,940,684 $312,227,335 $ - $356,168,019
Cash 384,706 0 - 384,706
Receivable for shares sold 2,454 182,622 - 185,076
Interest receivable 951,546 7,455,770 - 8,407,316
Receivable from John Hancock Advisers, Inc. 0 31,425 - 31,425
Receivable for investments sold 0 1,028,289 - 1,028,289
Other Assets 67,501 99,188 - 166,689
----------- ------------ ------------ ------------
Total assets 45,346,891 321,024,629 - 366,371,520
----------- ------------ ------------ ------------
LIABILITIES
Payable for shares repurchased 0 725,576 - 725,576
Dividend Payable 0 907,182 - 907,182
Accounts payable and accrued expenses 31,941 443,718 - 475,659
----------- ------------ ------------ ------------
Total liabilities 31,941 2,076,476 - 2,108,417
----------- ------------ ------------ ------------
CAPITAL PAID-IN $47,090,286 $356,244,025 - $403,334,311
Net unrealized depreciation
of investments and financial futures contracts (2,005,282) (33,299,170) - $(35,304,452)
Accumulated net realized gain (loss)
on investments and financial futures contracts 221,929 (4,123,929) - (3,902,000)
Undistributed net investment income 8,017 127,227 - 135,244
----------- ------------ ------------ ------------
Net assets $45,314,950 $318,948,153 - $364,263,103
=========== ============ ============ ============
NET ASSETS:
Tax-Exempt Series Fund - California
Class A $45,314,950 $ - $(45,314,950) a $ 0
Class B - - - -
California Tax-Free Income
Class A - 241,583,058 45,314,950 a 286,898,008
Class B - 77,365,095 - 77,365,095
----------- ------------ ------------ ------------
$45,314,950 $318,948,153 $ 0 $364,263,103
=========== ============ ============ ============
SHARES OUTSTANDING:
Tax-Exempt Series Fund - California
Class A 4,196,941 - (4,196,941) a (0)
Class B - - - -
California Tax-Free Income
Class A - 26,034,286 4,883,383 a 30,917,669
Class B - 8,339,105 - 8,339,105
----------- ------------ ------------ ------------
NET ASSET VALUE PER SHARE:
Tax-Exempt Series Fund - California
Class A $ 10.80 - $ (10.80) -
Class B $ 0.00 - $ 0.00 -
California Tax-Free Income
Class A - $ 9.28 - $ 9.28
Class B - $ 9.28 - $ 9.28
=========== ============ ============ ============
</TABLE>
See Notes to Pro-forma Combined Financial Statements
<PAGE> 236
<TABLE>
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
PRO-FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<CAPTION>
JOHN HANCOCK JOHN HANCOCK
TAX-EXEMPT CALIFORNIA
SERIES FUND TAX-FREE INCOME
CALIFORNIA PORTFOLIO FUND PRO
YEAR ENDED YEAR ENDED FORMA
DECEMBER 31, 1994 * DECEMBER 31, 1994 ADJUSTMENTS COMBINED
--------------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 3,049,517 $ 23,033,267 $ - $ 26,082,784
----------- ------------ -------- ------------
Total 3,049,517 23,033,267 - 26,082,784
----------- ------------ -------- ------------
Expenses
Investment managment fee 234,443 1,919,101 23,444 b 2,176,988
Distribution fee
Class A 140,665 405,172 (70,332) e 475,505
Class B - 709,198 - 709,198
Transfer agent fee (f)
Class A 116,261 167,490 - 283,751
Class B - 76,641 - 76,641
Custodian fee 26,391 100,287 (17,000) c 109,678
Registration and filing fees 2,052 36,394 (1,026) d 37,420
Administration fee 0 158,594 6,500 165,094
Auditing & Legal fees 20,354 39,491 (14,961) d 44,884
Printing 6,313 23,859 (3,157) d 27,015
Directors' fee 6,058 27,905 - 33,963
Miscellaneous 3,131 50,646 - 53,777
----------- ------------ -------- ------------
Total expenses 555,668 3,714,778 (76,532) 4,193,914
Reimbursement of expenses (227,448) (506,921) 99,978 (634,391)
----------- ------------ -------- ------------
Net Expenses 328,220 3,207,857 23,446 3,559,523
----------- ------------ -------- ------------
Net investment income 2,721,297 19,825,410 (23,446) 22,523,261
----------- ------------ -------- ------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND OPTIONS
Net realized gain/(loss) on
investments sold 78,964 (4,180,216) - (4,101,252)
Net realized gain on options 219,614 0 - 219,614
Change in net unrealized appreciation/
depreciation of investments (2,829,035) (51,218,323) - (54,047,358)
----------- ------------ -------- ------------
Net Realized and Unrealized
Loss on Investments and
Options (2,530,457) (55,398,539) - (57,928,996)
----------- ------------ -------- ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 190,840 $(35,573,129) $(23,446) $(35,405,735)
=========== ============ ======== ============
<FN>
* actual income and expense numbers annualized using 4 months of actuals (9/1/94 - 12/31/94)
</TABLE>
See Notes to Pro-forma Combined Financial Statements
<PAGE> 237
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Schedule of Investments
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ---------- -----------
<S> <C> <C>
LONG-TERM MUNICIPAL
OBLIGATIONS-97.01%
COMMUNITY
FACILITIES-12.62%
Capistrano Unified School
District Community
Facilities District Bonds
7.000% due 09/01/18...................... $ 1,500,000 $ 1,331,250
7.500% due 09/01/07...................... 3,500,000 3,246,250
8.375% due 10/01/20...................... 3,000,000 3,041,250
Fontana Special Tax
Community Facilities
District Bonds
8.375% due 04/01/11...................... 10,000,000 8,262,500
8.400% due 04/01/15...................... 1,000,000 823,750
Fresno Joint Powers
Financing Authority
Revenue Refunding Bonds
6.550% due 09/02/12...................... 2,000,000 1,812,500
Industry Urban Development
Agency Bonds
6.900% due 11/01/16...................... 1,020,000 975,375
7.375% with various
maturities to 05/01/15................ 1,145,000 1,187,937
Los Alamitos Unified
School District Special
Tax Community Facilities
District Bonds
7.150% due 08/15/21...................... 6,005,000 5,359,463
Los Angeles County
Improvement Bonds
8.375% due 09/02/18...................... 3,865,000 3,947,131
Pleasanton Joint Power
Financing Authority
Revenue Bonds
6.600% due 09/02/08...................... 2,940,000 2,730,525
Sacramento Unified School
District Special Tax
Community Facilities
District Bonds
7.300% due 09/01/13...................... 760,000 779,000
Saddleback Valley Unified
School District
Community Facilities
District Bonds
7.750% due 09/01/16...................... 3,200,000 3,124,000
Santa Clarita Community
Facilities District
Special Tax Bonds
7.450% due 11/15/10...................... 3,600,000 3,636,000
-----------
40,256,931
HEALTH-12.92%
California Health Facilities
Financing Authority
Revenue Bonds
5.600% due 05/01/33...................... 3,800,000 2,987,750
5.800% due 12/01/18...................... 3,140,000 2,633,675
6.250% due 07/01/12...................... 1,135,000 1,037,106
7.500% due 04/01/22...................... 2,000,000 2,020,000
California Statewide
Community Development
Authority Revenue
Certificates of
Participation
5.500% due 07/01/23...................... 6,000,000 4,915,000
5.600% due 11/15/17...................... 2,435,000 1,996,700
6.200% due 08/01/12...................... 1,250,000 1,129,687
6.250% due 08/01/22...................... 2,590,000 2,263,012
6.500% due 08/01/22...................... 15,750,000 13,978,125
6.700% due 05/01/11...................... 1,250,000 1,200,000
6.750% due 12/01/21...................... 7,500,000 7,040,625
------------
41,201,680
HOSPITALS-7.93%
Arcadia Hospital
Revenue Bonds
6.625% due 11/15/22...................... 1,205,000 1,051,363
Bakersfield Memorial
Hospital Revenue Bonds
6.500% due 01/01/22...................... 2,000,000 1,792,500
</TABLE>
6
<PAGE> 238
STATEMENT OF NET ASSETS
John HancocK California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
Covina Hospital Revenue
Certificates of
Participation
7.000% due 03/01/17...................... 925,000 857,937
Duarte City of Hope
Medical Center
Certificates of
Participation
6.250% due 04/01/23...................... 13,900,000 11,571,750
Rancho Mirage Joint Powers
Financing Authority
Certificates of
Participation
7.000% due 03/01/22...................... 4,500,000 4,201,875
San Bernardino County
Certificates of
Participation
5.500% due 08/01/17...................... 7,500,000 5,812,500
-----------
25,287,925
HOUSING--0.57%
California Housing Finance
Agency Revenue Bonds
7.375% due 08/01/17...................... 335,000 341,700
Upland Housing Authority
Revenue Bonds
7.500% due 07/01/03...................... 190,000 190,238
7.850% due 07/01/20...................... 1,280,000 1,294,400
-----------
1,826,338
INDUSTRIAL
DEVELOPMENT--0.30%
ABAG Finance Authority
for Nonprofit Corps.
Certificates of
Participation
6.800% due 10/01/11...................... 1,000,000 962,500
MORTGAGE INSURED
BONDS--1.38%
California Housing Finance
Agency Home Mortgage
Revenue Refunding Bonds
7.250% due 08/01/17...................... 3,500,000 3,561,250
Southern California Home
Finance Authority Single
Family Mortgage Revenue
Bonds Series A
6.750% due 09/01/22...................... 850,000 835,125
-----------
4,396,375
MUNICIPAL UTILITY
DISTRICTS--0.92%
Sacramento Municipal
Utility District Electric
Revenue Bonds
5.750% due 05/15/22...................... 2,700,000 2,274,750
Southern California Public
Power Authority
Transmission Project
Revenue Bonds
5.500% due 07/01/20...................... 800,000 655,000
-----------
2,929,750
PUBLIC FACILITIES--21.03%
Anaheim Certificates of
Participation
6.870% due 07/16/23(A)................... 2,000,000 1,690,000
Anaheim Public Finance
Authority Electric Utility
Revenue Bonds
5.750% due 10/01/22..................... 2,750,000 2,354,688
California Public Capital
Improvements Financing
Authority Revenue Bonds
8.125% due 03/01/95...................... 230,000 230,862
</TABLE>
7
<PAGE> 239
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
California State Public
Works Board Lease
Revenue Bonds
5.000% due 12/01/19 .................... 7,795,000 6,021,638
6.700% due 10/01/17 .................... 1,500,000 1,428,750
Chula Vista Certificates of
Participation
6.000% with various
maturities to 09/01/12 ................. 1,700,000 1,506,875
Concord Joint Powers
Financing Authority
Lease Revenue Bonds
5.250% due 08/01/19 .................... 3,520,000 2,772,000
Cupertino Certificates of
Participation
5.750% due 01/01/16 .................... 2,500,000 2,137,500
Delano Certificates of
Participation
7.000% due 04/01/10 .................... 2,000,000 1,915,000
Encinitas Certificates of
Participation
6.750% due 12/01/11 .................... 1,300,000 1,270,750
Inglewood Certificates of
Participation
7.000% due 08/01/19 .................... 1,000,000 966,250
Los Angeles County
Certificates of Participation
6.250% due 07/01/03 .................... 2,000,000 1,920,000
6.500% due 07/01/08 .................... 4,000,000 3,735,000
Los Angeles County Disney
Parking Certificates of
Participation
6.500% due 03/01/23 .................... 2,000,000 1,820,000
Los Angeles County Public
Works Finance Authority
Revenue Bonds
6.000% due 10/01/15 ................... 3,750,000 3,375,000
Oceanside Certificates of
Participation
6.000% due 04/01/17 .................... 2,875,000 2,461,719
6.375% due 04/01/12 .................... 3,000,000 2,767,500
Orange County Certificates
of Participation
6.700% due 08/01/18 .................... 1,000,000 963,750
San Diego County
Certificates of
Participation
6.750% due 08/01/19 .................... 3,000,000 2,996,250
San Jose Financing
Authority Revenue Bonds
6.400% due 09/01/17 .................... 2,000,000 1,857,500
San Marcus Public Facilities
Authority Revenue
Refunding Bonds
6.200% due 08/01/22 .................... 5,000,000 4,156,250
San Mateo Joint Powers
Financing Authority
Lease Revenue
Refunding Bonds
5.000% due 07/01/21 .................... 1,815,000 1,393,012
5.125% due 07/01/18 .................... 2,500,000 1,978,125
Santa Ana Financing
Authority Lease
Revenue Bonds
6.250% with various
maturities to 07/01/24 ................. 11,790,000 11,041,550
Stanislaus County
Certificates of
Participation
7.550% due 04/01/18 .................... 2,295,000 2,283,525
Vallejo Certificates of
Participation
8.000% due 02/01/06 .................... 2,000,000 2,025,000
-----------
67,068,494
REDEVELOPMENT-
COMMERCIAL--1.22%
Azusa Redevelopment
Agency Tax
Allocation Bonds
7.000% due 08/01/22 .................. 2,000,000 1,875,000
</TABLE>
8
<PAGE> 240
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ---------- -----------
<S> <C> <C>
BRENTWOOD REDEVELOPMENT
Agency Tax
Allocation Bonds
7.700% due 11/01/08..................... 135,000 135,844
Richmond Joint Powers
Financing Authority
Revenue Bonds
7.700% due 10/01/10..................... 1,835,000 1,880,875
-----------
3,891,719
REDEVELOPMENT-
MIXED USE--15.94%
Avalon Community
Improvement Agency Tax
Allocation Bonds
6.400% due 08/01/22..................... 1,975,000 1,752,813
Bakersfield Central District
Development Agency Tax
Allocation Bonds
6.625% due 04/01/15..................... 4,000,000 3,665,000
Burbank Redevelopment
Agency Tax
Allocation Bonds
6.000% due 12/01/23..................... 2,750,000 2,296,250
Clearlake Redevelopment
Agency Tax
Allocation Bonds
6.400% due 10/01/23..................... 500,000 446,250
Concord Redevelopment
Agency Tax Allocation
General Obligation Bonds
5.750% due 07/01/10..................... 1,145,000 970,387
Davis City Redevelopment
Agency Tax
Allocation Bonds
7.000% due 09/01/24..................... 5,115,000 5,204,513
Huntington Park Public
Financing Authority
Revenue Bonds
7.600% due 09/01/18..................... 5,000,000 4,675,000
Inglewood Redevelopment
Agency Tax
Allocation Bonds
6.125% due 07/01/13..................... 1,000,000 873,750
Lincoln Redevelopment
Agency Tax Allocation
Revenue Bonds
7.650% due 08/01/17..................... 3,350,000 3,379,313
Merced Public Financing
Authority Revenue Bonds
5.500% due 12/01/15..................... 3,630,000 2,958,450
Orange County
Development Agency Tax
Allocation Bonds
6.125% due 09/01/23..................... 3,000,000 2,302,500
Orange Redevelopment
Agency Tax Allocation
Revenue Bonds
5.700% due 10/01/17..................... 3,000,000 2,478,750
Palm Springs Financing
Authority Revenue Bonds
6.400% due 09/01/17..................... 3,000,000 2,737,500
Pittsburg Redevelopment
Agency Tax
Allocation Bonds
7.400% due 08/15/20..................... 3,040,000 2,983,000
Pomona Public Financing
Authority Revenue
Refunding Bonds
5.750% due 02/01/20..................... 10,000,000 7,912,500
Santa Cruz County Public
Financing Authority
Revenue Bonds
6.200% due 09/01/23..................... 2,000,000 1,677,500
Suisun City Redevelopment
Agency Tax
Allocation Bonds
7.250% due 10/01/20..................... 425,000 460,594
</TABLE>
9
<PAGE> 241
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
Tracy Community
Development Agency Toll
Road Revenue Bonds
6.000% due 03/01/24...................... 5,000,000 4,056,250
-----------
50,830,320
SCHOOLS--5.97%
Beaumont Unified School
District Certificates of
Participation
7.700% due 01/01/21...................... 1,000,000 985,000
Cucamonga School District
Certificates of
Participation
7.600% due 12/01/15...................... 1,000,000 1,022,500
Elk Grove Unified School
District Special
Tax Bonds
7.125% due 12/01/24...................... 1,000,000 1,016,250
Perris Union High School
District Certificates of
Participation
5.900% due 09/01/23...................... 2,000,000 1,667,500
San Gabriel Valley School
Financing Authority
Revenue Refunding Bonds
5.500% due 02/01/19...................... 1,500,000 1,215,000
Saugus Unified School
District Certificates of
Participation
7.500% due 08/01/09...................... 700,000 733,250
Sierra Unified School
District Certificates of
Participation
6.000% due 03/01/12...................... 2,000,000 1,707,500
Simi Valley Unified School
District Certificates of
Participation
6.100% due 08/01/22...................... 3,000,000 2,737,500
University of California
Certificates of Participation
5.500% due 11/01/14...................... 2,000,000 1,642,500
5.600% due 11/01/20...................... 6,180,000 4,990,350
Victor Valley Unified School
District Certificates of
Participation
7.875% due 11/01/12...................... 1,255,000 1,316,181
-----------
19,033,531
TRANSPORTATION--1.09%
San Diego MTDB Authority
Lease Revenue Bonds
5.375% due 06/01/23...................... 2,500,000 2,050,000
San Joaquin Hills
Transportation Corridor
Agency Toll Road
Revenue Bonds
6.750% due 01/01/32...................... 1,750,000 1,448,125
-----------
3,498,125
WASTE--2.98%
California Pollution Control
Financing Authority
Pollution Control
Revenue Bonds
5.850% due 12/01/23...................... 500,000 419,375
California Pollution Control
Financing Authority
Solid Waste Disposal
Revenue Bonds
6.875% due 11/01/27...................... 2,000,000 1,882,500
Stanislaus Waste to Energy
Financing Agency
Revenue Bonds
7.625% due 01/01/10...................... 1,000,000 1,007,500
Vallejo Sanitation and Flood
Control District
Certificates of Participation
5.000% due 07/01/19...................... 8,000,000 6,190,000
-----------
9,499,375
</TABLE>
10
<PAGE> 242
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
WATER--12.14%
Apple Valley Water District
Improvement Bonds
7.875% due 09/02/11...................... 2,425,000 2,500,781
California Department of
Water Resources
Central Valley Project
Revenue Bonds
5.500% due 12/01/23...................... 6,000,000 4,942,500
Calleguas-Las Virgines
Public Financing
Authority Revenue Bonds
5.125% due 07/01/21...................... 4,500,000 3,493,125
Central Coast Water
Authority Revenue Bonds
6.600% due 10/01/22...................... 3,200,000 3,132,000
East Bay Municipal Utility
District Water System
Revenue Refunding Bonds
6.000% due 06/01/12...................... 1,000,000 930,000
Metropolitan Water
District Waterworks
Revenue Bonds
5.000% due 07/01/20...................... 7,500,000 5,784,375
5.500% due 07/01/19...................... 5,000,000 4,181,250
Orange Cove Irrigation
District Revenue
Certificates of Participation
7.000% due 02/01/15...................... 2,500,000 2,409,375
7.250% due 02/01/12...................... 2,000,000 2,000,000
San Bernardino Municipal
Water Department
Certificates of Participation
6.250% due 02/01/17...................... 2,510,000 2,365,675
Santa Barbara Water and
Sewer Certificates of
Participation
6.700% due 04/01/27...................... 2,000,000 1,957,500
Turlock Irrigation District
Certificates of
Participation
7.300% due 01/01/11...................... 4,165,000 4,165,000
Turlock Irrigation District
Revenue Refunding
Bonds Series A
5.750% due 01/01/18...................... 1,000,000 873,750
------------
38,735,331
------------
TOTAL LONG-TERM
MUNICIPAL OBLIGATIONS
(Cost $342,717,564).......................... 309,418,394
SHORT-TERM
OBLIGATIONS--0.88%
VARIABLE RATE REVENUE
BONDS--0.88%
INDUSTRIAL
DEVELOPMENT--0.88%
California Pollution Control
Financing Authority
Pollution Control Revenue
Bonds Series A
5.000% due 01/03/95(B)................... 2,800,000 2,808,941
------------
TOTAL SHORT-TERM
OBLIGATIONS
(Cost $2,808,941)............................ 2,808,941
------------
TOTAL INVESTMENTS--97.89%
(Cost $345,526,505).......................... 312,227,335
CASH AND OTHER ASSETS,
LESS LIABILITIES--2.11%...................... 6,720,818
------------
NET ASSETS, at value,
equivalent to $9.28 per
share for 26,034,286
Class A Shares ($.01 par
value) outstanding and
$9.28 per share for
8,339,105 Class B Shares
($.01 par value)
outstanding--100.00%....................... $318,948,153
============
</TABLE>
(A) Floating rate securities.
(B) Interest rate reset date.
See Notes to Financial Statements.
11
<PAGE> 243
<TABLE>
JOHN HANCOCK MUTUAL FUNDS - TAX-EXEMPT SERIES FUND - CALIFORNIA PORTFOLIO
Schedule Of Investments
December 31, 1994 (Unaudited)
The Schedule of Investments is a complete list of all securities owned by the California Portfolio of the Tax-Exempt Series Fund on
December 31, 1994. The schedule consists of one main catagory: tax-exempt long-term bonds. The tax-exempt bonds
are further broken down by state. Under each state is a list of the securities owned by the California Portfolio.
<CAPTION>
PAR VALUE
INTEREST MATURITY (000'S MARKET
STATE, ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- -------------------------- -------- --------- --------- ------
<S> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
CALIFORNIA (94.03%)
Alameda, County of,
Cert of Part 1992 Cap Proj 6.750% 06-01-16 $500 $482,965
California Educational Facilities Auth,
Rev 1993 Ser B Pooled College & Univ Proj 6.125 06-01-09 1,000 920,420
California Health Facilities Financing Auth,
Hosp Rev 1991 Ser A San Diego Hosp Assoc 6.950 10-01-21 250 242,878
Hosp Rev Ref Ser 1990 Cedars-Sinai Medical Center 7.000 11-01-15 400 432,044
Ins Hosp Rev Ser 1990 Children's Hosp San Diego 6.500 07-01-20 500 483,710
Rev 1990 Ser A Kaiser Permanente 7.000 12-01-10 600 596,538
Rev Ser 1994A Scripps Research Institute 6.300 07-01-09 500 468,865
Sec Rev 1991 Ser Hosp of the Good Samaritan 7.000 09-01-21 250 238,115
California Housing Finance Agency,
Home Mtg Rev 1986 Ser A 8.100 08-01-16 75 77,645
Home Mtg Rev 1988 Ser B 8.600 08-01-19 45 47,711
Home Mtg Rev 1988 Ser D 8.000 08-01-19 100 103,707
Home Mtg Rev 1989 Ser A 7.625 08-01-09 90 93,638
Home Mtg Rev 1989 Ser B 8.000 08-01-29 100 103,755
Home Mtg Rev 1989 Ser D 7.500 08-01-29 150 151,530
Home Mtg Rev 1990 Ser D 7.875 08-01-31 25 25,926
Home Mtg Rev 1991 Ser A 7.375 08-01-17 165 168,958
Home Mtg Rev 1991 Ser C 7.450 08-01-11 70 72,570
Home Mtg Rev 1993 Ser C 5.650 08-01-14 1,205 1,037,505
Home Mtg Rev 1994 Ser C 6.650 08-01-14 1,000 966,000
Hsg Rev 1991 Ser E 7.000 08-01-26 690 691,773
California Pollution Control Financing Auth,
Poll Control Rev 1991 Ser Southern Calif Edison Co 6.900 12-01-17 500 494,290
Poll Control Rev 1992 Ser A Pacific Gas & Elec Co 6.625 06-01-09 500 490,205
California State Department of Water Resources,
Central Valley Proj Wtr Sys Rev Ser J-2 6.125 12-01-13 500 466,855
California State Public Works Board,
Lease Rev Depart of Corrections 1994 Ser A
Calif State Prison-Monterey County (Soledad II) 6.875 11-01-14 * 500 493,805
California Statewide Communities Development Auth,
Cert of Part the Trustees of the J. Paul Getty Trust 5.000 10-01-13 500 406,735
Campbell, City of,
1991 Cert of Part Civic Center Proj 6.750 10-01-17 155 166,025
1991 Cert of Part Civic Center Proj 6.750 10-01-17 1,095 1,047,148
Carson Redevelopment Agency,
Tax Alloc Ser 1992 Area No. 1 Redevel Proj 6.375 10-01-12 500 456,165
Tax Alloc Ser 1993B Area No. 1 Redevel Proj 6.000 10-01-16 500 423,385
Castaic Lake Water Agency,
Cert of Part Ser 1990 Wtr Sys Imp Proj 7.350 08-01-20 200 218,802
Central California Joint Powers Health Financing Auth,
Cert of Part Ser 1993 Community Hosp of Central California Proj 5.250 02-01-13 750 602,700
Central Coast Water Auth,
Rev State Wtr Proj Regional Facil Ser 1992 6.600 10-01-22 500 494,905
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj 1993 Ser 6.100 07-01-13 1,800 1,570,284
Cogeneration Proj Rev Carson Ice-Gen Proj 1993 Ser 6.200 07-01-20 1,000 857,180
Contra Costa Water Auth,
Wtr Treatment Rev Ref 1993 Ser A 5.750 10-01-20 1,000 874,140
Contra Costa Water District,
Wtr Treatment Rev Ser E 6.250 10-01-12 1,000 974,790
Wtr Treatment Rev Ser G 5.750 10-01-14 500 446,330
Costa Mesa Public Financing Auth,
1991 Local Agency Rev Ser A 7.100 08-01-21 250 219,155
Desert Hospital District,
Hosp Rev Cert of Part Ser 1990 Desert Hosp Corp Proj 8.000% 07-01-10 $300 $337,347
Fontana Public Financing Auth,
</TABLE>
<PAGE> 244
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000'S MARKET
STATE, ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- -------------------------- ------- --------- -------- -----------
<S> <C> <C> <C> <C>
Sub Lien Tax Alloc Rev 1991 Ser A North Fontana Redevel Proj 7.750 12-01-20 195 219,498
Tax Alloc Rev Ser 1990 Ser A North Fontana Redevel Proj 7.250 09-01-20 325 326,654
Fresno, City of,
Health Facil Rev Ser 1991 Saint Agnes Medical Center 6.625 06-01-21 250 233,370
Los Angeles City Department of Water and Power,
Elec Plant Ref Rev Second Iss of 1993 5.400 11-15-12 1,000 862,830
Elec Plant Rev Iss of 1990 7.125 05-15-30 200 213,108
Elec Plant Rev Iss of 1991 7.100 01-15-31 350 373,247
Elec Plant Rev Second Iss of 1989 6.750 12-15-29 250 263,642
Los Angeles County Health Facilities Auth,
Lease Rev Ref Olive View Medical Center Proj 7.500 03-01-08 450 484,448
Los Angeles County Transportation Commission,
Sales Tax Rev Ref Ser 1991-B 5.750 07-01-18 2,000 1,699,540
M-S-R Public Power Agency,
San Juan Proj Rev Ser C 6.875 07-01-19 845 820,672
Metropolitan Water District,
Waterworks Ref Rev Iss of 1986 6.750 06-01-22 155 152,890
Wtr Rev Iss of 1991 6.625 07-01-12 750 749,603
Mount Diablo Hospital District,
Hosp Rev Ser A 6.000 12-01-05 1,640 1,647,708
Mountain View City Capital Improvements Financing Auth,
1992 Rev City Hall/Community Theatre Complex & Shoreline Regional Park
Community Tax Alloc Refinancing 6.500 08-01-16 600 590,394
Northern California Transmission Agency,
Rev 1990 Ser A Calif-Oregon Transm Proj 7.000 05-01-13 100 104,748
Rev 1992 Ser A Calif-Oregon Transm Proj 6.500 05-01-16 1,000 985,700
Oakland, Port of,
Port Rev Ser E 6.400 11-01-07 1,000 1,009,320
Spec Facil Rev 1992 Ser A Mitsui O.S.K. Lines Ltd Proj 6.800 01-01-19 500 470,800
Orange, County of,
Ser A of 1990 Spec Tax of Community Facil Dist No. 87-3 Mission Viejo 7.800 08-15-15 350 390,719
Ser A of 1992 Spec Tax of Community Facil Dist No. 88-1 Aliso Viejo 7.350 08-15-18 1,000 1,113,130
Pasadena, City of,
1993 Ref Cert of Part Old Pasadena Parking Facil Proj 6.250 01-01-18 1,000 921,260
Rancho Mirage, City of, Joint Powers Financing Auth,
Civic Center Rev Ref Ser 1991A 7.500 04-01-17 195 215,413
Civic Center Rev Unref Ser 1991A 7.500 04-01-17 55 55,258
Riverside County Asset Leasing Corp,
Leasehold Rev 1993 Ser A County of Riverside Hosp Proj 6.500 06-01-12 1,000 921,750
Sacramento City Financing Auth,
Lease Rev Ref Ser A 5.375 11-01-14 500 424,415
Sacramento Municipal Utility District,
Elec Rev Ref 1992 Ser A 5.750 08-15-13 1,000 900,650
San Bernardino, County of,
Cert of Part Ser B Cap Facil Proj 6.875 08-01-24 350 361,025
Trans Auth Sales Tax Rev Ser A 5.400 03-01-10 1,000 865,270
San Diego County Regional Transportation Commission,
Sales Tax Rev 1991 Ser A 7.000 04-01-06 90 93,684
San Diego, City of,
Ind'l Dev Rev 1986 Ser A San Diego Gas & Elec Co 7.625 07-01-21 300 308,076
San Diego, City of, Metropolitan Transit Development Board's Auth,
1989 Lease Rev San Diego Bayside Light Rail Transit Ext 6.900 06-01-09 250 262,825
San Francisco State Building Auth,
Lease Ref Rev 1993 Ser A Dept of Gen Serv 5.000 10-01-13 500 394,645
San Joaquin Hill Tranportation Corridor Agency,
Sr Lien Toll Road Rev 6.750 01-01-32 1,000 827,210
San Jose Financing Auth,
Reassessment Rev 1994 Ser C 6.750 09-02-11 1,000 960,310
San Jose, City of,
1986 Cert of Part Convention Center Proj 7.875 09-01-10 300 318,501
San Mateo County Joint Powers Financing Auth,
Lease Rev 1994 Ser A San Mateo County Hlth Center 6.125 07-15-14 250 233,935
Santa Barbara, County of,
1990 Cert of Part 7.500 02-01-11 250 271,590
1991 Cert of Part 6.400 02-01-11 250 235,175
Santa Rosa, City of,
Wastewater Rev 1992 Ser A Subregional Wastewater Proj 6.500 09-01-22 500 487,425
Sequoia Hospital District,
Rev Ser 1993 5.375 08-15-13 500 389,645
Southern California Home Financing Auth,
Single Family Mtg Rev 1990 Iss B 7.750% 03-01-24 $45 $46,969
Southern California Public Power Auth,
Pwr Proj Rev 1987 Ref Ser A Palo Verde Proj 6.875 07-01-15 215 215,428
Pwr Proj Rev San Juan Unit 3 Ser A 5.250 01-01-14 500 419,885
Torrance City Redevelopment Agency,
Tax Alloc Ref Ser 1992 Downtown Redevel Proj 7.125 09-01-21 500 478,430
</TABLE>
<PAGE> 245
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000'S MARKET
STATE, ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- -------------------------- -------- -------- --------- --------
<S> <C> <C> <C> <C>
University of California, The Regents of,
1993 Ref Cert of Part UCLA Central Chiller/Cogeneration Facil 5.400 11-01-11 * 1,000 840,480
----------
42,607,774
----------
Guam ( 1.06%)
Guam Airport Auth,
Gen Rev 1993 Ser B 6.600 10-01-10 500 481,480
----------
Puerto Rico ( 1.88%)
Puerto Rico Ports Auth,
Spec Facil Rev 1993 Ser A American Airlines Inc Proj 6.300 06-01-23 1,000 851,430
----------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(COST $ 45,808,153) 96.97% $43,940,684
------ -----------
<FN>
* Securities, other than short term investments, newly added to the portfolio during the period ended December 31, 1994.
The percentage shown for each category is the total value of that category as a percentage of the net assets of the Portfolio.
</TABLE>
<PAGE> 246
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock California Tax-Free Income Fund (the "Registrant")
on Form N-1A under the Securities Act of 1933 and the Investment Company Act
of 1940 and (File No. 811=5979), which information is incorporated herein by
reference.
ITEM 16. EXHIBITS:
1.1 Registrant's Declaration Filed as Exhibit 1(a) to
of Trust. Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
1.2 Registrant's Amended and Filed as Exhibit 1(b) to
Restated Declaration of Trust. Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
1.3 Amendment to Registrant's Filed as Exhibit 1(c) to
Declaration of Trust dated Registrant's Registration
October 25, 1991. Statement on Form N-1A and
incorporated herein by
reference.
1.4 Amendment to Registrant's Filed as Exhibit 1(d) to
Declaration of Trust dated Registrant's Registration
December 23, 1994. Statement on Form N-1A and
incorporated herein by
reference.
2. By-Laws of Registrant. Filed as Exhibit 2 to the
Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
3. Not applicable.
<PAGE> 247
4. Form of Agreement and Plan of Filed herewith as Exhibit
Reorganization between the A to the Proxy Statement
Registrant and John Hancock Tax- and Prospectus included as
Exempt Series Fund, on behalf Part A of this Registration
of California Portfolio Statement on Form N-14.
5. Not applicable.
6. Investment Management Contract Filed as Exhibit 5(a) to
between the Registrant and John Registrant's Registration
Hancock Advisers, Inc. Statement on Form N-1A and
incorporated herein by
reference.
7.1 Distribution Agreement between Filed as Exhibit 6(a) to
the Registrant and John Hancock Registrant's Registration
Funds, Inc. (formerly named John Statement on Form N-1A and
Hancock Broker Distribution incorporated herein by
Services, Inc.). reference.
7.2 Form of Soliciting Dealer Filed as Exhibit 6(b) to
Agreement between John Hancock Registrant's Registration
Funds, Inc. and Selected Dealers Statement on Form N-1A and
incorporated herein by
reference.
7.3 Form of Financial Institution Filed as Exhibit 6(c) to
Sales and Service Agreement Registrant's Registration
between John Hancock Funds, Inc. Statement on Form N-1A and
and Selected Financial incorporated herein by
Institutions. reference.
8. Not applicable.
9. Master Custodian Agreement Filed as Exhibit 8 to
between John Hancock Mutual Registrant's Registration
Funds (including Registrant) and Statement on Form N-1A and
Investors Bank & Trust Company. incorporated herein by
reference.
10.1 Class A Distribution Plan between Filed as Exhibit 15(a) to
John Hancock California Tax-Free Registrant's Registration
Income Fund and John Hancock Statement on Form N-1A and
Funds, Inc. incorporated herein by
reference.
-2-
<PAGE> 248
10.2 Distribution Plan between Filed as Exhibit 15 to
California Portfolio and Registrant's Registration
John Hancock Funds, Inc. Statement on Form N-1A and
incorporated herein by
reference.
11. Opinion as to legality of Filed herewith as Exhibit
shares, and consent. 11.
12. Form of Opinion as to tax Filed herewith as Exhibit
matters. 12.
13. Not applicable.
14.1 Consent of Ernst & Young LLP Filed herewith as Exhibit
regarding the financial 14.1.
statements and highlights of
the Registrant.
14.2 Consent of Price Waterhouse LLP Filed herewith as Exhibit
regarding the financial 14.2.
statements and highlights of
California Portfolio.
15. Not applicable.
16. Powers of Attorney. Filed as addendum to
signature pages of
Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
17.1 Declaration of the Registrant Filed herewith as Exhibit
pursuant to Rule 24f-2 under 17.1
the Investment Company Act of
1940.
17.2 Prospectus of California Filed herewith as Exhibit
Portfolio, dated January 1, 17.2
1995 (as supplemented March 15,
1995)
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus which
is a part of this Registration Statement by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c) under the Securities
Act of 1933, as amended (the "1933 Act"), the reoffering prospectus will
contain the information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in addition
-3-
<PAGE> 249
to the information called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees that it will furnish to each
person to whom a Prospectus of the Registrant is delivered a copy of the
latest annual report to shareholders of the Registrant, upon request and
without charge.
-4-
<PAGE> 250
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts, on the 13th day of June, 1995.
JOHN HANCOCK CALIFORNIA TAX-FREE
INCOME FUND
By: /s/Edward J. Boudreau, Jr.
---------------------------
Edward J. Boudreau, Jr.
Chairman and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title
--------- -----
/s/Edward J. Boudreau, Jr. Chairman and Trustee )
- ---------------------------- (Principal Executive )
Edward J. Boudreau, Jr. Officer) )
)
) June 13, 1995
/s/James B. Little Senior Vice President )
- ---------------------------- and Chief Financial )
James B. Little Officer (Principal )
Financial and )
Accounting Officer) )
)
Trustees:
James F. Carlin* Trustee )
- ---------------------------- )
James F. Carlin )
)
William H. Cunningham* Trustee )
- ---------------------------- )
William H. Cunningham )
-5-
<PAGE> 251
)
)
Leo E. Linbeck, Jr.* Trustee )
- ---------------------------- )
Leo E. Linbeck, Jr. )
)
)
Charles L. Ladner* Trustee )
- ---------------------------- )
Charles L. Ladner )
)
)
Patricia P. McCarter* Trustee )
- ---------------------------- )
Patricia P. McCarter )
)
)
Steven R. Pruchansky* Trustee )
- ---------------------------- )
Steven R. Pruchansky )
)
)
Norman H. Smith* Trustee )
- ---------------------------- )
Norman H. Smith )
)
)
John P. Toolan* Trustee )
- ---------------------------- )
John P. Toolan )
)
- ---------------
*By:/s/Thomas H. Drohan Dated: June 13, 1995
----------------------------------
Thomas H. Drohan, Attorney-in-fact
-6-
<PAGE> 252
EXHIBIT INDEX
The following exhibits are filed as part of this Registration
Statement.
Exhibit No. Description
- ------------------------------------------------------------
4. Form of Agreement and Plan of
Reorganization Between the
Registrant and John Hancock
Tax-Exempt Series Fund, on
behalf of California Portfolio.
11. Opinion as to legality of shares, and
consent.
12. Form of Opinion as to tax matters.
14.1 Consent of Ernst & Young LLP
regarding the financial statements
and highlights of the Registrant.
14.2 Consent of Price Waterhouse LLP
regarding the financial statements
and highlights of California Portfolio.
17.1 Declaration of the Registrant pursuant
to Rule 24f-2 under the Investment
Company Act of 1940.
17.2 Prospectus of California Portfolio,
dated January 1, 1995 (as supplemented
March 15,1995).
- 7 -
<PAGE> 1
Exhibit 99.11
Opinion as to Legality
June 13, 1995
John Hancock California Tax-Free Income Fund
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
In connection with the filing of a registration statement under the
Securities Act of 1993, as amended (the "Act"), on Form N-14, with
respect to the shares of beneficial interest of John Hancock
California Tax-Free Income Fund, a Massachusetts business trust (the
"Trust"), it is the opinion of the undersigned that such shares of
beneficial interest of the Trust when issued will be legally issued,
fully paid and nonassessable, assuming that the Trust receives proper
consideration therefor in accordance with the provisions of the
Trust's Declaration of Trust as Amended and By-Laws and subject to
compliance with the Act, the Investment Company Act of 1940, as
amended, and the applicable state laws regarding the offer and sale
of securities.
In connection with this opinion it should be noted that under
Massachusetts law, shareholders of a Massachusetts business trust may
be held personally liable for the obligations of the Trust. However,
the Trust's Declaration of Trust disclaims shareholder liability for
obligations of the Trust and indemnifies any shareholder of the Trust,
with such indemnification to be paid solely out of the assets of the
Trust. Therefore, the shareholder's risk is limited to circumstances
in which the assets of the Trust are insufficient to meet the
obligations asserted against such assets.
The undersigned hereby consents to the filing of a copy of this
opinion, as an exhibit to the Trust's registration statement on Form
N-14, with the Securities and Exchange Commission and with the various
state securities administrators.
Sincerely,
JOHN HANCOCK ADVISERS, INC.
/s/ Thomas H. Connors
Thomas H. Connors
Assistant Secretary
Member of Massachusetts Bar
<PAGE> 1
EXHIBIT 12
, 1995
Board of Trustees
John Hancock Tax-Exempt Series Fund, on behalf
of California Portfolio
101 Huntington Avenue
Boston, Massachusetts 02199
Board of Trustees
John Hancock California Tax-Free Income Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Dear Members of the Boards of Trustees:
You have requested our opinion regarding the federal income tax
consequences of the acquisition by John Hancock California Tax-Free Income Fund
("Acquiring Fund"), of all of the assets of California Portfolio ("Acquired
Fund"), a series of John Hancock Tax-Exempt Series Fund (the "Trust"), in
exchange solely for (i) the assumption by Acquiring Fund of all of the
liabilities of Acquired Fund and (ii) the issuance of Class A voting shares of
beneficial interest of Acquiring Fund (the "Acquiring Fund Shares") to Acquired
Fund, followed by the distribution by Acquired Fund, in liquidation of Acquired
Fund, of the Acquiring Fund Shares to the shareholders of Acquired Fund and the
termination of Acquired Fund (the foregoing together constituting the
"reorganization" or the "transaction").
In rendering this opinion, we have examined and relied upon (i) the
prospectus for Acquired Fund, dated January 1, 1995, (ii) the statement of
additional information for Acquired Fund, dated January 1, 1995, (iii) the
prospectus for the Class A shares of Acquiring Fund, dated May 1, 1995, (iv)
the statement of additional information for the Class A shares of Acquiring
Fund, dated May 1, 1995, (v) the registration statement on Form N-14 of
Acquiring Fund relating to the transaction (the "Registration Statement") filed
with the Securities and Exchange Commission (the "SEC") on June , 1995, (vi)
the proxy statement/prospectus relating to the transaction (the "Proxy
Statement") included in the Registration Statement, (vii) the Agreement and
Plan of
<PAGE> 2
Boards of Trustees
John Hancock Tax-Exempt Series Fund
John Hancock California Tax-Free Income Fund
, 1995
Page 2
Reorganization, dated as of 1995, between Acquiring Fund and the
Trust, on behalf of Acquired Fund (the "Agreement"), (viii) the representation
letters on behalf of Acquiring Fund and Acquired Fund referred to below and
(ix) such other documents as we deemed appropriate. We have assumed that all
parties to the Agreement and to other documents relating to the transaction
have acted and will act in accordance with the terms of the Agreement and such
other documents.
The conclusions expressed herein represent our judgment regarding the
proper treatment of Acquiring Fund, Acquired Fund and the shareholders of
Acquired Fund on the basis of our analysis of the Internal Revenue Code of
1986, as amended (the "Code"), case law, Treasury regulations and the rulings
and other pronouncements of the Internal Revenue Service (the "Service") which
exist at the time this opinion is rendered, all of which are subject to
prospective or retroactive change. Our opinion represents our best judgment
regarding the issues presented and is not binding upon the Service or any
court. Moreover, our opinion does not provide any assurance that a position
taken in reliance on such opinion will not be challenged by the Service and
does not constitute any representation or warranty that such position, if so
challenged, will not be rejected by a court.
Acquiring Fund is a business trust established under the laws of The
Commonwealth of Massachusetts in 1989 and is registered as an open-end
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act").
Acquiring Fund commenced investment operations in 1990. The investment
objective of Acquiring Fund is to provide as high a level of current income
exempt from both federal income taxes and California personal income taxes as
is consistent with preservation of capital. Acquiring Fund pursues its
objective by normally investing substantially all of its assets in debt
obligations issued by or on behalf of the State of California, its political
subdivisions, municipalities, agencies, instrumentalities or public authorities
and obligations issued by other governmental entities the interest on which is
excluded from gross income for federal income tax purposes and is exempt from
California personal income taxes, subject to certain quality standards
described in Acquiring Fund's prospectus. Acquiring Fund may also invest to a
limited extent in obligations issued by or on behalf of states other than
California, obligations issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities, commercial paper, repurchase agreements and
certain other investments described in its prospectus.
<PAGE> 3
Boards of Trustees
John Hancock Tax-Exempt Series Fund
John Hancock California Tax-Free Income Fund
, 1995
Page 3
Acquired Fund is a series of a business trust, the Trust, which was
established under the laws of The Commonwealth of Massachusetts in 1987 and is
registered as an open-end investment company under the 1940 Act. The Trust has
three series, including Acquired Fund, and may create additional series in the
future. Each series of the Trust has separate assets and liabilities from those
of each other series. Each such series is treated as a separate corporation and
regulated investment company pursuant to Section 851(h) of the Code.
Acquired Fund commenced investment operations in 1987. The investment
objective of Acquired Fund is to provide current income that is excludable from
gross income for federal income tax purposes and is exempt from the personal
income tax of California. Acquired Fund seeks to provide the maximum level of
tax-exempt income that is consistent with preservation of capital. As a
fundamental policy, at least 80% of Acquired Fund's net assets (taken at market
value) will consist of municipal bonds and notes and other debt instruments
whose interest is excludable from federal gross income and exempt from
California personal income tax. Acquired Fund's investments are subject to
certain quality standards described in its prospectus. Acquired Fund may also
invest, to a limited extent, in repurchase agreements, certain options and
future contracts, and certain other obligations or instruments described in its
prospectus.
The steps to be taken in the reorganization, as set forth in the
Agreement, will be as follows:
(i) Acquired Fund will transfer to Acquiring Fund all of its assets
(consisting, without limitation, of portfolio securities and instruments,
dividend and interest receivables, cash and other assets). In exchange for the
assets transferred to it, Acquiring Fund will (A) assume all of the liabilities
of Acquired Fund (comprising all of its known and unknown liabilities and
referred to hereinafter as the "Acquired Fund Liabilities") and (B) issue
Acquiring Fund Shares to Acquired Fund that have an aggregate net asset value
equal to the value of the assets transferred to Acquiring Fund by Acquired
Fund, less the value of the Acquired Fund Liabilities assumed by Acquiring
Fund.
(ii) Promptly after the transfer of its assets to Acquiring Fund,
Acquired Fund will distribute in liquidation the Acquiring Fund Shares it
receives in the exchange to Acquired Fund shareholders PRO RATA in exchange for
their surrender of their shares of Acquired Fund ("Acquired Fund Shares"). In
these exchanges, holders of Acquired Fund Shares, which are of only one class
and have not been given a class designation, will receive
<PAGE> 4
Boards of Trustees
John Hancock Tax-Exempt Series Fund
John Hancock California Tax-Free Income Fund
, 1995
Page 4
Acquiring Fund Shares designated as Class A ("Class A Acquiring Fund Shares").
(iii) After such exchanges, liquidation and distribution, the existence
of Acquired Fund will be promptly terminated in accordance with Massachusetts
law.
The Agreement and the transactions contemplated thereby were approved
by the Board of Trustees of Acquiring Fund at a meeting held on May 1, 1995.
Acquiring Fund shareholders are not required and were not asked to approve the
transaction. The Agreement and the transactions contemplated thereby were
approved by the Board of Trustees of the Trust, on behalf of Acquired Fund, at
a meeting held on May 16, 1995, subject to the approval of the shareholders of
Acquired Fund. Acquired Fund shareholders approved the transaction at a meeting
held on , 1995.
Massachusetts law does not provide dissenters' rights for Acquired Fund
shareholders in the transaction. Additionally, it is the position of the
Division of Investment Management of the SEC that appraisal rights, in contexts
such as the reorganization, are inconsistent with Rule 22c-1 under the 1940 Act
and are therefore preempted and invalidated by such rule. Consequently,
Acquired Fund shareholders will not have dissenters' or appraisal rights in the
transaction.
Our opinions set forth below are subject to the following factual
assumptions being true on the date the transaction is consummated, i.e., the
date of this opinion letter. Authorized representatives of Acquiring Fund and
Acquired Fund have represented to us by letters of even date herewith that the
following assumptions are true on this date:
(a) Acquiring Fund has no plan or intention to redeem or otherwise
reacquire any of the Acquiring Fund Shares received by shareholders of Acquired
Fund in the transaction except in connection with its legal obligation under
Section 22(e) of the 1940 Act as a registered open-end investment company to
redeem its own shares.
(b) After the transaction, Acquiring Fund will continue the historic
business of Acquired Fund and will use all of the assets acquired from Acquired
Fund in the ordinary course of a business.
(c) Acquiring Fund has no plan or intention to sell or otherwise
dispose of any assets of Acquired Fund acquired in the transaction, except for
dispositions made in the ordinary course
<PAGE> 5
Boards of Trustees
John Hancock Tax-Exempt Series Fund
John Hancock California Tax-Free Income Fund
, 1995
Page 5
of its business or to maintain its qualification as a regulated investment
company under Subchapter M of the Code.
(d) The shareholders of Acquiring Fund and the shareholders of Acquired
Fund will bear their respective expenses, if any, in connection with the
transaction.
(e) Acquiring Fund and Acquired Fund will each bear its own expenses
incurred in connection with the transaction. If any liabilities of Acquired
Fund attributable to such expenses remain unpaid on the closing date of the
transaction and are assumed by Acquiring Fund in the transaction, the amount
assumed will be attributable to Acquired Fund's expenses that are solely and
directly related to the transaction in accordance with the guidelines
established in Rev. Rul. 73-54, 1973-1 C.B. 187.
(f) There is no indebtedness between Acquiring Fund and Acquired Fund.
(g) Acquired Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since its inception, and qualifies as such for
its final taxable year ending on the closing date of the transaction.
(h) Acquiring Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since its inception, and qualifies as such as of
the date of the transaction.
(i) Neither Acquiring Fund nor Acquired Fund is under the jurisdiction
of a court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
(j) Acquiring Fund does not own and since its inception has not owned,
directly or indirectly, any shares of Acquired Fund.
(k) Acquiring Fund will not pay cash in lieu of fractional shares in
connection with the transaction.
(l) As of the date of the transaction, the fair market value of the
Acquiring Fund Shares issued to Acquired Fund in exchange for the assets of
Acquired Fund is approximately equal to the fair market value of the assets of
Acquired Fund received by Acquiring Fund, minus the value of the Acquired Fund
Liabilities assumed by Acquiring Fund.
<PAGE> 6
Boards of Trustees
John Hancock Tax-Exempt Series Fund
John Hancock California Tax-Free Income Fund
, 1995
Page 6
(m) Acquired Fund shareholders will not be in control (within the
meaning of Sections 368(a)(2)(H) and 304(c) of the Code, which provide that
control means the ownership of shares possessing at least 50% of the total
combined voting power of all classes of shares that are entitled to vote or at
least 50% of the total value of shares of all classes) of Acquiring Fund after
the transaction.
(n) The principal business purposes of the transaction are to combine
the assets of Acquiring Fund and Acquired Fund in order to capitalize on
economies of scale in expenses such as the costs of accounting, legal, transfer
agency, insurance, custodial, and administrative services and to increase
diversification.
(o) As of the date of the transaction, the fair market value of the
Class A Acquiring Fund Shares received by each holder of Acquired Fund Shares
is approximately equal to the fair market value of the Acquired Fund Shares
surrendered by such shareholder.
(p) There is no plan or intention on the part of any shareholder of
Acquired Fund that owns beneficially 5% or more of the Acquired Fund Shares
and, to the best knowledge of management of Acquired Fund, there is no plan or
intention on the part of the remaining shareholders of Acquired Fund to sell,
redeem, exchange or otherwise dispose of a number of the Acquiring Fund Shares
received in the transaction that would reduce the aggregate ownership of the
Acquiring Fund Shares by former Acquired Fund shareholders to a number of
shares having a value, as of the date of the transaction, of less than fifty
percent (50%) of the value of all of the formerly outstanding Acquired Fund
Shares as of the same date. Shares of Acquired Fund and Acquiring Fund held by
Acquired Fund shareholders and otherwise sold, redeemed, exchanged or disposed
of prior or subsequent to the transaction as part of the plan of reorganization
are taken into account for purposes of this representation.
(q) Acquired Fund assets transferred to Acquiring Fund comprise at
least ninety percent (90%) of the fair market value of the net assets of
Acquired Fund and at least seventy percent (70%) of the fair market value of
the gross assets held by Acquired Fund immediately prior to the transaction.
For purposes of this representation, amounts used by Acquired Fund to pay its
outstanding liabilities, including reorganization expenses, and all redemptions
and distributions (except for redemptions in the ordinary course of business
upon demand of a shareholder that Acquired Fund is required to make as an
open-end investment company pursuant to Section 22(e) of the 1940 Act and
regular, normal dividends, which dividends include any final distribution of
previously
<PAGE> 7
Boards of Trustees
John Hancock Tax-Exempt Series Fund
John Hancock California Tax-Free Income Fund
, 1995
Page 7
undistributed investment company taxable income and net capital gain for
Acquired Fund's final taxable year ending on the closing date of the
transaction) made by Acquired Fund immediately preceding the transaction are
taken into account as assets of Acquired Fund held immediately prior to the
transaction.
(r) The Acquired Fund Liabilities assumed by Acquiring Fund plus the
liabilities, if any, to which the transferred assets are subject were incurred
by Acquired Fund in the ordinary course of its business or are expenses of the
transaction.
(s) The fair market value of the Acquired Fund assets transferred to
Acquiring Fund equals or exceeds the sum of the Acquired Fund Liabilities
assumed by Acquiring Fund and the amount of liabilities, if any, to which the
transferred assets are subject.
(t) The total adjusted basis of the Acquired Fund assets transferred to
Acquiring Fund equals or exceeds the sum of the Acquired Fund Liabilities
assumed by Acquiring Fund and the amount of liabilities, if any, to which the
transferred assets are subject.
(u) Acquired Fund does not pay compensation to any
shareholder-employee.
(v) Acquired Fund has no outstanding warrants, options, convertible
securities or any other type of right pursuant to which any person could
acquire Acquired Fund Shares.
On the basis of and subject to the foregoing and in reliance upon the
representations described above, we are of the opinion that:
(a) The acquisition by Acquiring Fund of all of the assets of Acquired
Fund solely in exchange for the issuance of Acquiring Fund Shares to Acquired
Fund and the assumption of all of the Acquired Fund Liabilities by Acquiring
Fund, followed by the distribution by Acquired Fund, in liquidation of Acquired
Fund, of Acquiring Fund Shares to Acquired Fund shareholders in exchange for
their Acquired Fund Shares and the termination of Acquired Fund, will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C) of the
Code. Acquiring Fund and Acquired Fund will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code.
(b) No gain or loss will be recognized by Acquired Fund upon (i) the
transfer of all of its assets to Acquiring Fund solely in
<PAGE> 8
Boards of Trustees
John Hancock Tax-Exempt Series Fund
John Hancock California Tax-Free Income Fund
, 1995
Page 8
exchange for the issuance of Acquiring Fund Shares to Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by Acquiring Fund and (ii)
the distribution by Acquired Fund of such Acquiring Fund Shares to the
shareholders of Acquired Fund (Sections 361(a) and 361(c) of the Code).
(c) No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Acquired Fund solely in exchange for the issuance of
Acquiring Fund Shares to Acquired Fund and the assumption of all of the
Acquired Fund Liabilities by Acquiring Fund (Section 1032(a) of the Code).
(d) The basis of the assets of Acquired Fund acquired by Acquiring Fund
will be, in each instance, the same as the basis of such assets in the hands of
Acquired Fund immediately prior to the transfer (Section 362(b) of the Code).
(e) The tax holding period of the assets of Acquired Fund in the hands
of Acquiring Fund will, in each instance, include Acquired Fund's tax holding
period for those assets (Section 1223(2) of the Code).
(f) The shareholders of Acquired Fund will not recognize gain or loss
upon the exchange of all of their Acquired Fund Shares solely for Acquiring
Fund Shares as part of the transaction (Section 354(a)(1) of the Code).
(g) The basis of the Acquiring Fund Shares received by the Acquired
Fund shareholders in the transaction will be the same as the basis of the
Acquired Fund Shares surrendered in exchange therefor (Section 358(a)(1) of the
Code).
(h) The tax holding period of the Acquiring Fund Shares received by
Acquired Fund shareholders will include, for each shareholder, the tax holding
period for the Acquired Fund Shares surrendered in exchange therefor, provided
the Acquired Fund Shares were held as capital assets on the date of the
exchange (Section 1223(1) of the Code).
No opinion is expressed or implied regarding the federal income tax
consequences to Acquiring Fund, Acquired Fund or Acquired Fund shareholders of
any conditions existing at the time of, effects resulting from, or other
aspects of the transaction except as expressly set forth above.
Very truly yours,
Hale and Dorr
<PAGE> 1
EXHIBIT 14.1
------------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Proxy Statement and Prospectus and to the use, in this Registration Statement
(Form N-14) dated June 15, 1995, of our report on the financial statements and
financial highlights of John Hancock California Tax-Free Income Fund dated
February 3, 1995.
/s/ ERNST & YOUNG, LLP
ERNST & YOUNG, LLP
Boston, Massachusetts
June 9, 1995
<PAGE> 1
EXHIBIT 14.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Proxy Statement and
Prospectus (the "Proxy/Prospectus") and Statement of Additional Information of
John Hancock Tax-Exempt Series Fund dated January 1, 1995 constituting parts of
this registration statement on Form N-14 (the "Registration Statement") of John
Hancock California Tax-Free Income Fund ("the Trust") of our report dated
October 14, 1994, relating to the financial statements and financial
highlights (the "Financial Statements") appearing in the August 31, 1994 Annual
Report to Shareholders of John Hancock Tax Exempt Series Fund-California
Portfolio (the "Fund"), which are also incorporated by reference into the
Registration Statement. We further consent to the reference to us under the
heading "Experts" in such Proxy/Prospectus, to the reference to us under the
heading "The Fund's Financial Highlights" in the Prospectus of the Fund dated
January 1, 1995, which is incorporated by reference into the Registration
Statement and to the reference to us under the heading "Independent Auditors"
in the Statement of Additional Information of the Fund dated January 1, 1995,
which is also incorporated by reference into the Proxy/Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
June 14, 1995
<PAGE> 1
EXHIBIT 17.1
Registration No. 33-31675
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM N-1
REGISTRATION STATEMENT UNDER / X /
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No . 2 / X /
Post-Effective Amendment No. / /
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 / X /
AMENDMENT NO. 2
(Check appropriate box or boxes)
___________________________
TRANSAMERICA CALIFORNIA TAX-FREE INCOME FUND
(Exact name of registrant as specified in charter)
1000 Louisiana
Houston, Texas 77002
(Address of principal executive offices)
Registrant's Telephone Number -- (713) 751-2400
Thomas R. Powers
1000 Louisiana
Houston, Texas 77002
(Name and Address of Agent for Service)
Copies to:
Kenneth S. Gerstein, Esq. Robert L. Stillwell, Esq.
Gordon Hurwitz Butowsky Weitzen Baker & Botts
Shalov & Wein 3000 One Shell Plaza
101 Park Avenue Suite 3121
New York, NY 10178 Houston, Texas 77002
Approximate date of commencement of proposed public offering: as soon
as practicable this post-effective amendment becomes the effective.
______________________________
Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
_______________________________
Registrant has elected, pursuant to rule 24f-2 (b) (2) under the
Investment Company Act of 1940, to register an indefinite number of its shares
of beneficial interest for sale under the Securities Act of 1993.
<PAGE> 1
EXHIBIT 17.2
------------
John Hancock Pacific Basin Equities Fund, January 1, 1995
John Hancock Global Rx Fund, January 1, 1995
John Hancock Tax-Exempt Series Fund, January 1, 1995
Supplement to Class A and Class B Prospectus
The "Qualifying for a Reduced Sales Charge" section under SHARE PRICE is
supplemented as follows:
Effective March 15, 1995, participant directed defined contribution plans
with at least 100 eligible employees at the inception of the Fund account
may purchase Class A shares of the Fund without an initial sales charge but
if the shares are redeemed within 12 months after the end of the calendar
year in which the purchase was made, a contingent deferred sales charge will
be imposed at the rate for Class A shares described in the prospectus.
March 15, 1995
<PAGE> 2
JOHN HANCOCK
TAX-EXEMPT SERIES
FUND --
CALIFORNIA PORTFOLIO
MASSACHUSETTS PORTFOLIO
NEW YORK PORTFOLIO
PROSPECTUS
JANUARY 1, 1995
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
--
Expense Information .................................................... 2
The Fund's Financial Highlights ........................................ 3
Investment Objective and Policies ...................................... 6
Organization and Management of the Fund ................................ 13
The Portfolios' Expenses ............................................... 14
Dividends and Taxes .................................................... 14
Performance ............................................................ 16
How to Buy Shares ...................................................... 17
Share Price ............................................................ 19
How to Redeem Shares ................................................... 22
Additional Services and Programs ....................................... 24
This Prospectus sets forth information about John Hancock Tax-Exempt Series
Fund (the "Fund") and its series portfolios, the California Portfolio, the
Massachusetts Portfolio and the New York Portfolio (each "a Portfolio" and
collectively "the Portfolios"), that an investor should know before
investing.Please read and retain it for future reference.
Additional information about the Fund and the Portfolios has been filed with
the Securities and Exchange Commission (the "SEC"). You can obtain a copy of the
Statement of Additional Information, dated January 1, 1995, and incorporated by
reference into this Prospectus, free of charge upon request by writing or
telephoning: John Hancock Investor Services Corporation, P.O. Box 9116, Boston,
Massachusetts 02205-9116, 1-800-225-5291, (1-800-554-6713 TDD).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 3
EXPENSE INFORMATION
The purpose of the following information is to help you to understand the
various fees and expenses that you will bear directly or indirectly when you
purchase shares of the Portfolios. The operating expenses are based on actual
expenses for each Portfolio's fiscal year ended August 31, 1994, adjusted to
reflect current fees and expenses. Actual fees and expenses may in the future be
greater or less than those indicated.
<TABLE>
<CAPTION>
CALIFORNIA MASSACHUSETTS NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ----------------- ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSE
Maximum sales charge imposed on purchases (as a
percentage of offering price) .................... 4.50% 4.50% 4.50%
Maximum sales charge imposed on reinvested
dividends ....................................... None None None
Maximum deferred sales load** ...................... None None None
Redemption fees+ ................................... None None None
Exchange fee ....................................... None None None
ANNUAL PORTFOLIO OPERATING EXPENSES
(As a percentage of average net assets)
Management fees (after expense limitation) ......... .17% .15% .14%
12b-1 fee*** ....................................... .30% .30% .30%
Other expenses* (after expense limitation) ......... .23% .25% .26%
Total Portfolio operating expenses* (after expense
limitation) ...................................... .70% .70% .70%
<FN>
- ---------
*Expenses reflect a voluntary limitation by the Fund's Adviser. Without this
limitation, the expense categories as a percentage of average net assets
would be: California Portfolio: management fee -- 0.50%; other expenses --
0.23%; and total Portfolio operating expenses -- 1.03%; Massachusetts
Portfolio: management fee -- 0.50%; other expenses -- 0.25% and total
Portfolio operating expenses -- 1.05%; New York Portfolio: management fee --
0.50%; other expenses -- 0.26% and total Portfolio operating expenses --
1.06%.
**No sales charge is payable at the time of purchase on investments of $1
million or more, but for these investments a contingent deferred sales charge
may be imposed, as described under the caption "Share Price," in the event of
certain redemption transactions within one year of purchase.
***The amount of the 12b-1 fee used to cover service expenses will be up to
0.25% of average net assets, and the remaining portion will be used to cover
distribution expenses. See "The Portfolios" Expenses."
+Redemption by wire fee (currently $4.00) not included.
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
This example illustrates the expenses you would incur on a $1,000 investment in
each of the Portfolios over the following periods, assuming a hypothetical 5%
annual rate of return and a voluntary 0.7%
expense limitation ................................. $52 $66 $82 $128
</TABLE>
(This example should not be considered a representation of future expenses;
actual expenses may be greater or less than those shown.)
The Fund's payment of a distribution fee may result in a long-term
<PAGE> 4
shareholder indirectly paying more than the economic equivalent of the maximum
front-end sales charge permitted under the National Association of Securities
Dealers Rules of Fair Practice.
The management and 12b-1 fees referred to above are more fully explained in
this Prospectus under the section "The Portfolios" Expenses" and in the
Statement of Additional Information under the captions "Investment Advisory and
Other Services" and "Distribution Contract."
<PAGE> 5
THE FUND'S FINANCIAL HIGHLIGHTS
The following information has been audited by the Fund's independent
accountants, Price Waterhouse LLP, whose unqualified report on the Fund's
financial statements and financial highlights for the year ended August 31, 1994
is included in the Annual Report which is included in the Statement of
Additional Information ("SAI") for each Portfolio. Further information about the
performance of the Fund is contained in the Fund's Annual Report to shareholders
which may be obtained free of charge by writing or telephoning John Hancock
Investor Services Corporation, at the address or telephone number listed on the
front page of this Prospectus.
CALIFORNIA PORTFOLIO
Selected data for a Fund share outstanding throughout each period indicated,
investment returns, key ratios and supplemental data are listed as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988<F3>
---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $12.36 $11.68 $11.25 $10.72 $10.93 $10.36 $ 9.91
------ ------ ------ ------ ------ ------ ------
Net Investment Income<F2> 0.62 0.67 0.70 0.70 0.67 0.68 0.61
Net Realized and Unrealized
Gain (Loss) on Investments (0.76) 0.82 0.43 0.53 (0.21) 0.57 0.45
------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations (0.14) 1.49 1.13 1.23 0.46 1.25 1.06
------ ------ ------ ------ ------ ------ ------
Dividends from Net
Investment Income (0.62) (0.67) (0.70) (0.70) (0.67) (0.68) (0.61)
------ ------ ------ ------ ------ ------ ------
Distributions from Net
Realized Gain on
Investments Sold (0.22) (0.14) -- -- -- -- --
Total Distributions (0.84) (0.81) (0.70) (0.70) (0.67) (0.68) (0.61)
------ ------ ------ ------ ------ ------ ------
Net Asset Value,
End of Year $11.38 $12.36 $11.68 $11.25 $10.72 $10.93 $10.36
====== ====== ====== ====== ====== ====== ======
Total Investment Return
at Net Asset Value<F5> (1.13%) 13.36% 10.34% 11.83% 4.24% 12.32% 9.99%<F1>
------ ------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's omitted) $49,042 $47,624 $33,896 $25,914 $13,618 $10,682 $5,018
Ratio of Expenses to Average
Net Assets<F2> 0.70% 0.67% 0.60% 0.60% 1.00% 1.00% 1.00%<F1>
Ratio of Net Investment
Income to Average Net
Assets<F2> 5.27% 5.62% 6.09% 6.35% 6.11% 6.11% 6.26%<F1>
Portfolio Turnover Rate 38% 93% 50% 7% 2% 0% 10%
Ratio of Adjusted Expenses to
Average Net Assets(a) 1.26% 1.55% 1.64% 1.72% 1.57% 1.39% 3.92%<F1>
Ratio of Adjusted Net
Investment Income to
Average Net Assets<F4> 4.71% 4.74% 5.05% 5.23% 5.54% 5.87% 3.34%<F1>
- ---------
<FN>
<F1>On an annualized basis.
<F2>Reflects expense limitations in effect during the years. As a result of such
limitations, expenses of the Portfolio for the years ended August 31, 1994,
</TABLE>
<PAGE> 6
1993, 1992, 1991, 1990, 1989, and 1988 reflect reductions of $0.07, $0.10,
$.12, $.12, $.06, $.10 and $.29, respectively.
<F3>For the period from the date shares of beneficial interest were initially
sold to the public which was September 9, 1987.
<F4>Percentages on an unreimbursed basis reflect what the actual ratio of
expenses to average net assets and the ratio of net investment income to
average net assets would have been.
<F5>Does not reflect sales charge.
<PAGE> 7
MASSACHUSETTS PORTFOLIO
Selected data for a Fund share outstanding throughout each period indicated,
investment returns, key ratios and supplemental data are listed as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988<F3>
---- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.43 $11.75 $11.15 $10.63 $10.94 $10.63 $10.00
------ ------ ------ ------ ------ ------ ------
Net Investment Income<F2> 0.63 0.67 0.71 0.73 0.69 0.70 0.65
Net Realized and Unrealized Gain
(Loss) on Investments (0.75) 0.82 0.60 0.53 (0.31) 0.31 0.63
------ ------ ------ ------ ------ ------ ------
Total from Investment Operations (0.12) 1.49 1.31 1.26 0.38 1.01 1.28
------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from Net Investment
Income (0.63) (0.67) (0.71) (0.73) (0.69) (0.70) (0.65)
------ ------ ------ ------ ------ ------ ------
Distributions from Net
Realized Gain on
Investments Sold (0.12) (0.14) -- (0.01) -- -- --
Total Distributions (0.75) (0.81) (0.71) (0.74) (0.69) (0.70) (0.65)
------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of Year $11.56 $12.43 $11.75 $11.15 $10.63 $10.94 $10.63
====== ====== ====== ====== ====== ====== ======
Total Investment Return at Net
Asset Value<F5> (0.97%) 13.29% 12.11% 12.10% 3.49% 9.67% 13.13%<F1>
------ ------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's omitted) $54,122 $50,019 $29,113 $15,015 $9,968 $9,138 $4,757
Ratio of Expenses to Average
Net Assets<F2> 0.70% 0.67% 0.60% 0.60% 1.00% 1.00% 1.00%<F1>
Ratio of Net Investment Income
to Average Net Assets<F2> 5.28% 5.61% 6.18% 6.64% 6.31% 6.35% 6.28%<F1>
Portfolio Turnover Rate 29% 79% 56% 29% 2% 2% 20%
Ratio of Adjusted Expenses to
Average Net Assets<F4> 1.23% 1.58% 1.78% 2.04% 1.77% 1.51% 3.75%<F1>
Ratio of Adjusted Net Investment
Income to Average Net Assets<F4> 4.75% 4.70% 5.00% 5.20% 5.54% 5.84% 3.53%<F1>
- ---------
<FN>
<F1>On an annualized basis.
<F2>Reflects expense limitations in effect during the years. As a result of such limitations, expenses of the Portfolio for the
years ended August 31, 1994, 1993, 1992, 1991, 1990, 1989, and 1988 reflect reductions of $.06, $.11, $.14, $.16, $.08, $.11
and $.28, respectively.
<F3>For the period from the date shares of beneficial interest were initially sold to the public which was September 3, 1987.
<F4>Percentages on an unreimbursed basis reflect what the actual ratio of expenses to average net assets and the ratio of net
investment income to average net assets would have been.
<F5>Does not reflect sales charge.
</TABLE>
<PAGE> 8
NEW YORK PORTFOLIO
Selected data for a Fund share outstanding throughout each period indicated,
investment returns, key ratios and supplemental data are listed as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988<F3>
---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $12.63 $11.90 $11.29 $10.74 $11.01 $10.48 $10.00
------ ------ ------ ------ ------ ------ ------
Net Investment Income<F2> 0.64 0.68 0.72 0.72 0.67 0.68 0.61
Net Realized and Unrealized Gain
(Loss) on Investments (0.77) 0.87 0.63 0.55 (0.25) 0.55 0.48
------ ------ ------ ------ ------ ------ ------
Total from Investment Operations (0.13) 1.55 1.35 1.27 0.42 1.23 1.09
------ ------ ------ ------ ------ ------ ------
Dividends from Net
Investment Income (0.64) (0.68) (0.72) (0.72) (0.67) (0.68) (0.61)
------ ------ ------ ------ ------ ------ ------
Distributions from Net Realized
Gain on Investments Sold (0.13) (0.14) (0.02) -- (0.02) (0.02) --
Total Distributions (0.77) (0.82) (0.74) (0.72) (0.69) (0.70) (0.61)
------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of Year $11.73 $12.63 $11.90 $11.29 $10.74 $11.01 $10.48
====== ====== ====== ====== ====== ====== ======
Total Investment Return at Net
Asset Value<F5> (1.05%) 13.70% 12.17% 12.24% 3.74% 11.87% 11.40%<F1>
------ ------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, end of Period
(000's omitted) $55,690 $52,444 $33,806 $20,878 $13,357 $8,795 $4,306
Ratio of Expenses to Average
Net Assets<F2> 0.70% 0.67% 0.60% 0.60% 1.00% 1.00% 1.00%<F1>
Ratio of Net Investment Income
to Average Net Assets<F2> 5.28% 5.63% 6.22% 6.57% 6.17% 6.30% 6.11%<F1>
Portfolio Turnover Rate 23% 56% 48% 12% 10% 10% 16%
Ratio of Adjusted Expenses to
Average Net Assets<F4> 1.23% 1.54% 1.68% 1.82% 1.69% 1.65% 4.84%<F1>
Ratio of Adjusted Net Investment
Income to Average Net Assets<F4> 4.75% 4.76% 5.14% 5.35% 5.48% 5.65% 2.26%<F1>
- ---------
<FN>
<F1>On an annualized basis.
<F2>Reflects expense limitations in effect during the years. As a result of such limitations, expenses of the Portfolio for the
years ended August 31, 1994, 1993, 1992, 1991, 1990, 1989, and 1988 reflect reductions of $.06, $.11, $.13, $.13, $.08, $.13
and $.38, respectively.
<F3>For the period from the date shares of beneficial interest were initially sold to the public which was September 11, 1987.
<F4>Percentages on an unreimbursed basis reflect what the actual ratio of expenses to average net assets and the ratio of net
investment income to average net assets would have been.
<F5>Does not reflect sales charge.
</TABLE>
<PAGE> 9
INVESTMENT OBJECTIVE AND POLICIES
THE PORTFOLIOS SEEK TO PROVIDE INCOME THAT IS EXCLUDABLE FROM FEDERAL AND STATE
TAX.
The investment objective of the Portfolios is to provide current income that is
excludable from gross income for Federal income tax purposes and, for the
California, Massachusetts and New York Portfolios, respectively, is, exempt from
the personal income tax of California, Massachusetts and New York, and from New
York City personal income taxes. The Portfolios seek to provide the maximum
level of tax exempt income that is consistent with preservation of capital.
There is no assurance that the Portfolios will achieve their investment
objective.
As a fundamental policy, at least 80% of each Portfolio's net assets (taken at
market value) will consist of municipal bonds and notes and other debt
instruments, whose interest is excludable from Federal gross income and exempt
from the personal income tax of California, Massachusetts or New York State and
New York City, as the case may be ("Tax-Exempt Bonds").
From time to time, however, limited availability of these obligations may result
from market conditions. As a temporary defensive posture, a Portfolio may seek
to invest its assets in debt securities whose interest is excludable for Federal
income tax purposes during these periods, but not necessarily exempt from the
personal income tax of the applicable State and New York City, and subject to
the possible application of alternative minimum taxes.
When John Hancock Advisers, Inc. (the "Adviser") determines that unfavorable
investment conditions warrant a temporary defensive posture, each Portfolio may
invest up to 50% of its net assets in cash or in short-term obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, or in
commercial paper and bank obligations (as limited below). Dividends derived from
interest earned on these obligations generally are taxable to shareholders for
Federal purposes. They may also be taxable for state and local purposes unless
treated as derived from interest on direct obligations of the U.S. Government
under the laws of certain states, including California and Massachusetts.
Municipal bonds generally are classified as either general obligation bonds or
revenue bonds. General obligation bonds are backed by the credit of an issuer
having taxing power and are payable from the issuer's general unrestricted
revenues. Their payment may depend on an appropriation of the issuer's
legislative body. Revenue bonds, by contrast, are payable only from the revenues
derived from a particular project, facility or a specific revenue source. They
are not generally payable from the unrestricted revenues of the issuer.
Municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, and project notes.
Municipal commercial paper obligations are unsecured promissory notes issued by
municipalities to meet short-term credit needs.
All of the investments of each Portfolio will be made in:
(1) Tax-exempt bonds which are rated A or better by Standard & Poor's Ratings
Group ("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's")
or Fitch Investors Services, Inc. ("Fitch"). Alternatively, the bonds may
be unrated but considered by the Adviser to be of comparable quality, and
issued by issuers which have other securities rated not lower than A by
Standard & Poor's, Moody's or Fitch.
(2) Tax-exempt bonds which are rated BBB or BB by Standard & Poor's, Baa or Ba
by Moody's or BBB or BB by Fitch, or which are unrated but are considered by
the Adviser to be of comparable quality. Not more than one-third of the
Portfolio's total assets will be invested in such tax-exempt bonds rated
lower than A or determined to be of comparable quality.
(3) Notes of issuers having an issue of outstanding tax-exempt bonds rated not
lower than A by Standard & Poor's, Moody's or by Fitch, or notes which are
guaranteed by the U.S. Government or rated MIG-1 or MIG-2 by Moody's or
unrated notes which are determined to be of comparable quality by the
Adviser.
(4) Obligations issued or guaranteed by the U.S. Government, its agencies or
<PAGE> 10
instrumentalities. Some obligations issued by an agency or instrumentality
may be supported by the full faith and credit of the U.S. Treasury while
others may be supported only by the credit of the particular Federal agency
or instrumentality.
(5) Commercial paper which is rated A-1 or A-2 by Standard & Poor's, P-1 or P-
2 by Moody's, or at least F-1 by Fitch, or which is not rated, but is
considered by the Adviser to be of comparable quality; obligations of banks
with $1 billion of assets and cash equivalents, including certificates of
deposit, bankers acceptances and repurchase agreements. Ratings of A-2 or
P-2 on commercial paper indicate a strong capacity for timely payment,
although the relative degree of safety is not as high as for issues
designated A-1 or P-1.
The Portfolio may invest in certain types of tax-exempt bonds whose interest
income may be treated as a tax preference item under the Federal alternative
minimum tax. The Portfolios will not include tax-exempt bonds generating this
income for purposes of measuring compliance with the 80% fundamental investment
policy described above.
Debt obligations rated in the lower rating categories, or which are unrated,
involve greater price volatility and risk of loss of principal and income. In
addition, the issuer of lower rated debt obligations may have more difficulty
making principal and interest payments in adverse financial conditions. The
market price and liquidity of lower rated securities generally responds to
short-term market developments to a greater extent than for higher rated
securities, because these developments are perceived to have a more direct
relationship to the issuer's ability to meet its ongoing debt obligations. Bonds
rated BB or Ba are generally referred to as junk bonds. See "Appendix."
The Fund has registered as a "non-diversified" investment company permitting the
Adviser to invest more than 5% of the assets of each Portfolio in the
obligations of any one issuer. Since a relatively high percentage of a
Portfolio's assets may be invested in the obligations of a limited number of
issuers, the value of Portfolio shares may be more susceptible to any single
economic, political or regulatory event than would the shares of a diversified
investment company.
THE FUND MAY EMPLOY CERTAIN INVESTMENT STRATEGIES TO HELP ACHIEVE ITS INVESTMENT
OBJECTIVE.
RESTRICTED SECURITIES. The Fund may purchase restricted securities, including
those eligible for resale to "qualified institutional buyers" pursuant to Rule
144A under the Securities Act of 1933 (the "Securities Act"). These purchases
are subject to a fundamental restriction limiting all illiquid securities held
by the Fund to not more than 10% of the Portfolio's net assets. The Trustees
will carefully monitor the Fund's investments in Rule 144A securities, focusing
on certain factors, including valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of reducing
the level of liquidity in the Fund, to the extent that qualified institutional
buyers lose interest in purchasing these securities for a time.
REPURCHASE AGREEMENTS. In a repurchase agreement, a Portfolio buys a security
subject to the right and obligation to sell it back to the seller at a higher
price. These transactions must be fully collateralized at all times, but involve
some credit risk to the Portfolio if the other party defaults on its obligation
and the Portfolio is delayed in or prevented from liquidating the collateral.
WHEN-ISSUED SECURITIES. Purchasing tax-exempt bonds on a when-issued basis may
increase a Portfolio's overall investment exposure and involves a risk of loss
if the value of the securities declines before the settlement date.
SHORT-TERM TRADING. Short-term trading might be utilized to take advantage of
market developments, yield disparities and variations in the creditworthiness of
issuers. A high turnover rate involves greater transaction expenses to a
Portfolio, and could involve a higher proportion of short-term capital gains,
distributions of which are taxable to shareholders at ordinary income rates.
Portfolio turnover rates are shown in the section "The Fund's Financial
Highlights."
VARIABLE AND FLOATING RATE OBLIGATIONS. A Portfolio may invest in variable rate
and floating rate obligations, whose interest payments may fluctuate based on
<PAGE> 11
changes in market rates. The interest rates payable on variable rate obligations
are adjusted at designated periodic intervals. The interest rates on floating
rate obligations are adjusted whenever there is a change in the market interest
rate on which the obligation's interest is based.
FINANCIAL FUTURES CONTRACTS. A Portfolio may buy and sell futures contracts and
options on futures contracts to hedge against changes in securities prices and
interest rates or for speculative purposes. A Portfolio's ability to hedge
successfully through futures transactions will depend on the Adviser's ability
to predict accurately the future direction of interest rate changes and other
market factors. There is no assurance that a liquid market for futures and
options will always exist. In addition, a Portfolio could be prevented from
opening or realizing the benefits of closing out a futures or options position
because of position limits or exchange imposed limits on daily price
fluctuations. The potential loss incurred by a Portfolio in writing options on
futures is unlimited and may exceed the premium received.
All of the Portfolios' futures contracts and options will be traded on a U.S.
commodity exchange or board of trade. A Portfolio will not engage in a futures
or related option transaction, except for closing purchase and sale
transactions, if immediately thereafter the sum of the amount of initial margin
deposits on the Portfolio's outstanding speculative positions in futures and
related options, plus the amount of premiums paid for outstanding options on
futures, exceeds 5% of the market value of the Portfolio's net assets.
THE PORTFOLIOS FOLLOW CERTAIN POLICIES WHICH MAY HELP REDUCE INVESTMENT RISK.
The Portfolios have adopted certain fundamental investment restrictions which
are detailed in the Statement of Additional Information. The Portfolios'
investment objective and restrictions are fundamental and may not be changed
without shareholder approval.
BROKERS ARE CHOSEN BASED ON BEST PRICE AND EXECUTION.
When choosing brokerage firms to carry out each Portfolio's transactions
involving a broker, the Adviser gives primary consideration to execution at the
most favorable prices, taking into account the broker's professional ability and
quality of service. Consideration may also be given to the broker's sales of
Portfolio shares. Pursuant to procedures determined by the Trustees, the Adviser
may place securities transactions with brokers affiliated with the Adviser.
These brokers include Tucker Anthony Incorporated and Sutro & Company, Inc. They
are indirectly owned by John Hancock Mutual Life Insurance Company, which in
turn indirectly owns the Adviser.
THE STATE PORTFOLIOS: CONSIDERATIONS AND RISKS
CALIFORNIA PORTFOLIO. The California Portfolio's ability to achieve its
investment objective depends on the ability of the issuers of tax-exempt bonds
of California and its political subdivisions, municipalities, agencies,
instrumentalities or public authorities ("California tax-exempt bonds") to meet
their continuing obligations for the payment of principal and interest.
In 1978, California passed Proposition 13, limiting the level of property taxes.
This and subsequent legislation limiting taxation and spending may affect the
creditworthiness of the state or local agencies in the future. If either
California or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Portfolio, the Portfolio's net
asset value, the Portfolio's ability to preserve or realize capital appreciation
or the Portfolio's liquidity could be adversely affected.
On December 7, 1994, Orange County, California (the "County"), together with its
pooled investment fund (the "Fund"), filed for protection under Chapter 9 of the
federal Bankruptcy Code. This filing occured after reports that the Fund had
suffered significant market losses in its investments caused a liquidity crisis
for the Fund and the County. Approximately 180 other public entities, most but
not all located in the County, were also depositors in the Fund. As of December
13, 1994, the County indicated that the Fund had lost about 27% of its initial
deposits of around $7.4 billion. The County may suffer further losses as it
sells investments to restructure the Fund. Many of the entities which kept
moneys in the Fund, including the County, are facing cash flow difficulties
because of the bankruptcy filing and may be required to reduce programs or
capital projects. The County and some of these entities have, and others may in
the future, default in payment of their obligations. Moody's and Standard &
Poor's have suspended, reduced to below investment grade levels, or placed on
<PAGE> 12
"Credit Watch" various securities of the County and the entities participating
in the Fund.
The State of California has no obligation with respect to any obligations or
securities of the County or any of the other participating entities, although
under existing legal precedents, the State may be obligated to ensure that
school districts have sufficient funds to operate.
The recession starting in mid-1990 was the deepest and longest in California
since the 1930's, and caused a sharp drop in State revenues. As a result, the
State accumulated a budget deficit of almost $3 billion at its peak at June 30,
1992. Each budget in the last four years has required the Governor and
Legislature to undertake multibillion dollar cuts in program expenditures,
transfers of fiscal responsibilities to local governments, various one-time
adjustments, accounting changes and tax increases in an effort to balance
revenues and expenditures. The difficulties in reaching a consensus approach to
this persistent imbalance produced a two-month delay in passing the June 1992
budget which forced the State to issue registered warrants to pay its bills. In
June 1994, the State passed a timely budget which proposed eliminating the
accumulated budget deficit of about $2 billion by the end of Fiscal Year
1995-96.
The persistent budget deficits, combined with about $1.7 billion of off-budget
payments made to schools and reductions of internally borrowable funds, severely
depleted the State's cash resources, so that it has had to resort to repeated
external borrowing to meet its cash needs since 1992. In order to meet cash flow
requirements for the 1994-95 fiscal year and to defer repayment of part of the
budget deficit, the State issued $7 billion of short-term securities in July and
August, 1994, of which $4 billion mature in April, 1996. In order to assure
repayment of this borrowing, the State enacted legislation which can lead to
automatic, across-the-board cuts in certain General Fund expenditures in the
1995-96 fiscal year if cash flow projections made in October, 1995 show
deterioration from projections made in July, 1994 when the borrowings were made.
This plan places the burden upon the Legislature to maintain on-going control
over the annual budget and could place additional financial pressure on local
governments' reliance on program expenditures. The State will continue to have
to rely on access to the short-term debt markets to meet its cash flow
requirements in the foreseeable future.
The California economy began to show signs of growth during the first half of
1994. After four consecutive years of on-going job losses, company relocations
out of state, and unemployment rates exceeding 9% at times, the State has
registered net job growth. Over the next two years, modest growth is expected to
continue with the economy generating momentum going into 1996. After recovering
from the losses inflicted by the January 1994 Los Angeles earthquake, personal
income is expected to rebound in 1995. Any setbacks to this recovery could lead
to weaker than expected collections of State and local revenues and continued
budget pressures.
As a result of the ongoing budget imbalance, growing deficits and sluggish
recovery, the State credit ratings have been recently downgraded. In July 1994,
both Moody's and Standard and Poors lowered their credit ratings on California
General Obligation debts. Moody's dropped its Aa ratings to A1 and Standard and
Poors reduced A+ ratings to A. Fitch Investors Service also lowered the State's
rating from Aa to A. Continued financial stress and failure by the State to
directly address its deficit could lead to further downgrades.
MASSACHUSETTS PORTFOLIO. The Massachusetts Portfolio's ability to achieve its
investment objective depends on the ability of the issuers of tax-exempt bonds
issued by the Commonwealth of Massachusetts (the "Commonwealth") and its
political subdivisions, municipalities, agencies, instrumentalities or public
authorities ("Massachusetts tax-exempt bonds") to meet their continuing
obligations to pay principal and interest.
Between 1982 and 1988, the Commonwealth had a strong economy which was evidenced
by low unemployment and high personal income growth as compared to national
trends. However in the late 80's and early 1990's, the Commonwealth experienced
a significant economic slowdown, with particular deterioration in the
construction, real estate, financial and manufacturing sectors, including
certain high technology areas. The Commonwealth's diverse economy has recently
stabilized, with unemployment dropping to 5.4% in May, 1994, below the national
rate of 6%. This expansion reflects gains in the service and construction
sectors, aided in part by major highway and harbor cleanup projects in Boston.
<PAGE> 13
As a result of the economic downturn, the Commonwealth's finances were
negatively impacted. Prior to 1992, the Commonwealth had posted operating
deficits for five consecutive years. More recently, Massachusetts has benefited
from a combination of more conservative fiscal policy and budgetary practices as
well as increased tax revenues. Over the past three years, the Commonwealth has
posted positive results, closing each year with a positive operating fund
balance. Fiscal 1992 closed with an operating fund balance of $549 million,
followed by a 1993 balance of $563 million. Fiscal year 1994 ended with an
operating fund balance of $580.7 million (unaudited). Fiscal year 1995 is
currently estimated to end with an operating fund balance of $463 million. On
July 10, 1994, the Governor signed into law the 1995 budget. The current budget
provides for total expenditures of $16.9 billion, an increase of 6.1% over the
1994 budget. The final composition of the budget may be altered by Legislative
reconsideration of some $298 million in expenditures vetoed by the Governor.
In October, 1993, Standard and Poor's and Fitch raised their Massachusetts
general obligation ratings from "A" to "A+", citing continued improvement in the
Commonwealth's budgeting and financial management and the apparent stabilization
of the Massachusetts economy. Roughly $2.1 billion of related agency and other
Commonwealth debt were affected, most notably, the Massachusetts Bay
Transportation Authority, the Massachusetts Convention Center Authority, and the
Plymouth County Correctional Facility Project.
Commonwealth funded local aid is an important component of the operating budgets
of cities and towns, and decreases in funding can negatively impact their
ratings. These changes could also negatively impact their ability to pay
assessments of certain Commonwealth agencies, including the Massachusetts Bay
Transportation Authority and the Massachusetts Water Resources Authority. If a
locality incurs substantial financial difficulties, the Commonwealth may
intervene and place the locality under State receivership.
The tax on personal property and real estate is virtually the only source of tax
revenues available to the Commonwealth's cities and towns to meet local costs.
"Proposition 2 1/2", an initiative petition adopted by the voters in November
1980, limits the power of Massachusetts cities and towns and certain
tax-supported districts and public agencies to raise revenue from property taxes
to support their operations, including the payment of debt service. Proposition
2 1/2 required many cities and towns to reduce their property tax levies to a
stated percentage of the full and fair cash value of their taxable real estate
and personal property, and limited the amount that all cities and towns might
increase their property tax from year to year.
Growth of tax revenues in the Commonwealth is limited by law. Effective July 1,
1990, limitations were placed on the amount of direct bonds the Commonwealth
could have outstanding in a fiscal year, and the amount of the total
appropriation in any fiscal year that may be expected for general obligation
debt service was limited to ten percent. Moreover, Massachusetts local
governmental entitites are subject to certain limitations on their taxing power.
These could affect their ability, or the ability of the Commonwealth, to meet
their respective financial obligations.
If either Massachusetts or any of its local governmental entities is unable to
meet its financial obligations, the income derived by the Portfolio, the
Portfolio's net asset value, the Portfolio's ability to preserve or realize
capital appreciation or the Portfolio's liquidity could be adversely affected.
NEW YORK PORTFOLIO. The New York Portfolio's ability to achieve its investment
objective is dependent upon the ability of the issuers of tax-exempt bonds of
New York State (the "State") and its political subdivisions and authorities
("New York tax-exempt bonds") to meet their continuing obligations for the
payment of principal and interest. The New York tax-exempt bonds can be affected
by political and economic developments within the State, or by the financial
condition of the State, its public authorities (the "Authorities") and political
subdivisions, particularly the City of New York ("New York City"). A brief
summary of these risks and special considerations follows.
The State economy has started to slowly recover from the national recession of
1990. After lagging the nation's modest recovery by almost two years, expansion
in health and business services and additions to the construction and finance
sectors netted the State 120,000 new jobs during Fiscal Years 1993 and 1994.
This marked the reversal of three straight years of job losses which produced an
unemployment rate of 8.5% in 1992. Personal income during Fiscal Year 1994
increased by over 6% following three years with increases averaging 3.5%.
<PAGE> 14
Both the State and the City have experienced serious financial difficulties and
recent declines in their credit standings. Moody's, S&P and Fitch have currently
assigned ratings of "A", "A-" and "A+", respectively, to the State's general
obligation bonds. There is no assurances that any of these ratings will continue
for any given period of time or will not be revised downward or withdrawn
entirely by a rating agency. Any downward revision or withdrawal of any
application rating may have an adverse impact on the New York tax-exempt bonds
held in the New York Portfolio.
New York cities and towns have experienced financial stress due to the State's
slow recovery from the 1990 recession and cutbacks to local assistance. The
fiscal 1995 budget calls for the delivery of an additional $700 million in local
education and tax relief funds. These new monies provide some assistance to
local budgets but do not alleviate all of the accumulated fiscal strain on local
governments.
The revised State financial plan calls for the continuation of moderate growth
during 1994 which then is expected to slacken during 1995. This moderate
recovery of the State economy may or may not generate sufficient tax revenue
growth to meet the budgeted requirements for social service expenditures. If
either New York or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Portfolio, the Portfolio's net
asset value, the Portfolio's ability to preserve or realize capital appreciation
or its liquidity could be adversely affected.
For a further discussion of tax-exempt bonds held by the Portfolios, the risks
to which they are subject and the special considerations associated with
investing in California, Massachusetts and New York, see the Statement of
Additional Information.
ORGANIZATION AND MANAGEMENT OF THE FUND
THE TRUSTEES ELECT OFFICERS AND RETAIN THE INVESTMENT ADVISER WHO IS RESPONSIBLE
FOR THE DAY-TO-DAY OPERATIONS OF THE FUND, SUBJECT TO THE TRUSTEES' POLICIES AND
SUPERVISION.
Each of the Portfolios is a non-diversified series portfolio of the Fund. The
Fund is an open-end investment management company organized as a Massachusetts
business trust in 1987. The Fund has an unlimited number of authorized shares
which are divided into three series of shares. The shares of each portfolio are
of one class and have equal rights as to voting, redemption, dividends, and
liquidation in their respective portfolio. The Portfolios are not required to
hold annual shareholder meetings, although special meetings may be called for
such purposes as electing or removing Trustees, changing fundamental policies or
approving a management contract.
JOHN HANCOCK ADVISERS, INC. ADVISES INVESTMENT COMPANIES HAVING A TOTAL VALUE OF
APPROXIMATELY $10 BILLION.
The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the John Hancock Mutual Life Insurance Company, a financial services company. It
provides the Portfolios and other investment companies in the John Hancock group
of funds with investment research and portfolio management services. John
Hancock Funds, Inc. ("John Hancock Funds") distributes shares for all of the
John Hancock funds directly and through selected broker-dealers ("Selling
Brokers"). Certain Fund officers are also officers of the Adviser and John
Hancock Funds.
Dianne Sales-Singer is the Fund's portfolio manager and is responsible for the
day-to-day management of the Fund. Ms. Sales-Singer has been with the Adviser
since 1989. Prior to joining the Adviser, she was employed at Bear Stearns &
Co. Inc.
In order to avoid any conflict with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
<PAGE> 15
FOR THE 1994 FISCAL YEAR, THE ADVISER VOLUNTARILY DID NOT IMPOSE A MANAGEMENT
FEE.
THE PORTFOLIOS' EXPENSES
For managing its investment and business affairs, each Portfolio pays a monthly
fee to the Adviser which is based on a stated percentage of the Portfolio's
average daily net asset value.
THE PORTFOLIOS PAY DISTRIBUTION AND SERVICE FEES FOR MARKETING AND SALES-RELATED
SHAREHOLDER SERVICING.
The Fund has adopted a distribution plan under Rule 12b-1 (the "Plan") under the
Investment Company Act of 1940. Under the Plan, the Fund will pay distribution
and service fees at an aggregate annual rate of 0.30% of each Portfolio's
average daily net assets, provided that the amount of the service fee will not
exceed 0.25% of average daily net assets. The distribution fees will be used to
reimburse John Hancock Funds for its distribution expenses.
These include, but are not limited to: (i) initial and ongoing sales
compensation to Selling Brokers and others (including affiliates of John Hancock
Funds) engaged in the sale of Fund shares, and (ii) marketing, promotional and
overhead expenses incurred in connection with the distribution of Fund shares.
The service fees will be used to compensate Selling Brokers for providing
personal and account maintenance services to shareholders. Any unreimbursed
expenses will not be carried beyond one year from the date incurred.
The Adviser may, from time to time, agree that all or a portion of its fee will
not be imposed for specified periods or make other arrangements to limit a
Portfolio's expenses to not more than a specified percentage of average net
assets. The Adviser retains the right to impose such fee and recover any other
payments to the extent annual expenses fall below the limit at the end of the
fiscal year. For the year ended August 31, 1990, the Adviser voluntarily agreed
to limit each Portfolio's total expenses to 1.00% of average net assets.
Effective September 1, 1990, this expense limitation was voluntarily changed to
0.60% of average net assets and on January 1, 1993, was changed to 0.70% of
average net assets.
DIVIDENDS AND TAXES
DIVIDENDS. Dividends from each Portfolio's net investment income are declared
daily and paid monthly. Capital gains, if any, are generally declared and
distributed annually. Dividends are reinvested in additional shares unless you
elect the option to receive them in cash. If you elect the cash option and the
U.S. Postal Service cannot deliver your checks, your election will be converted
to the reinvestment option.
TAXATION. The Portfolios intend to comply with certain Federal tax requirements
so that interest earned by the Portfolios from tax-exempt bonds will be
Federally tax-free when paid to you as "exempt-interest dividends". Dividends
derived from interest on certain tax-exempt bonds that are "private activity
bonds" may, however, increase the alternative minimum tax liability of
shareholders.
Shareholders receiving social security benefits and certain railroad retirement
benefits may be subject to Federal income tax on up to 85 percent of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Portfolios.
Shares of the Portfolios may not be an appropriate investment for persons who
are "substantial users" of facilities financed by industrial development or
private activity bonds, or persons related to "substantial users." Consult your
tax adviser if you think this may apply to you.
Dividends from a Portfolio's net taxable income, if any, including any market
discount included in a Portfolio's income and dividends from any net short-term
capital gains are taxable to you as ordinary income. Dividends from a
Portfolio's net long-term capital gains are taxable as long-term capital gains.
These dividends are taxable, whether received in cash or reinvested in
<PAGE> 16
additional shares. Certain dividends may be paid by a Portfolio in January of a
given year, but they may be taxable as if you received them the previous
December. The Portfolios will send you a statement by January 31 showing the tax
status of the dividends you received for the prior year.
The Portfolios have qualified and intend to continue to qualify as regulated
investment companies under Subchapter M of the Internal Revenue Code. As a
regulated investment company, each Portfolio will not be subject to Federal
income taxes on any net investment income and net realized capital gains that
are distributed to its shareholders at least annually. Additionally, you may
realize a gain or loss, when you redeem (sell) or exchange shares.
On the account application, you are asked to certify that the social security or
other taxpayer identification number you provided is your correct number and
that you are not subject to backup withholding of Federal income tax. If you do
not provide this information or are otherwise subject to this withholding, the
Portfolio may be required to withhold 31% of your taxable dividends, redemptions
and exchanges.
CALIFORNIA TAXES
The California Portfolio intends to comply with certain California tax
requirements so that dividends paid by the California Portfolio which are
derived from interest on obligations, the interest on which is exempt from
California income tax, will be exempt from California personal income tax in the
hands of shareholders of the California Portfolio. Dividends from other sources,
including capital gain dividends, if any, will not be exempt from California
personal income tax. Dividends paid by the California Portfolio are not exempt
from California franchise or corporate income taxes. California does not treat
tax-exempt interest (or dividends paid by the California Portfolio attributable
to such interest) as a tax preference item for purposes of its alternative
minimum tax.
MASSACHUSETTS TAXES
To the extent that exempt-interest dividends paid to shareholders by the
Massachusetts Portfolio are derived from interest on tax-exempt bonds of the
Commonwealth of Massachusetts and its political subdivisions or Puerto Rico, the
U.S. Virgin Islands or Guam and are properly designated as such, these
distributions will also be exempt from Massachusetts personal income tax. For
Massachusetts personal income tax purposes, dividends from the Portfolio's
taxable net investment income, tax-exempt income from obligations not described
in the preceding sentence, and short-term capital gains, if any, will generally
be taxable as ordinary income, whether received in cash or additional shares.
However, any dividends that are properly designated as attributable to interest
the Portfolio receives on direct U.S. Government obligations will not be subject
to Massachusetts personal income tax. Dividends properly designated as from net
long-term capital gains are generally taxable as long-term capital gains,
regardless of how long shareholders have held their Portfolio shares. However, a
portion of such a long-term capital gains distribution will be exempt from
Massachusetts personal income tax if it is properly designated as attributable
to gains realized on the sale of certain tax-exempt bonds issued pursuant to
Massachusetts Statutes that specifically exempt such gains from Massachusetts
taxation. Dividends from investment income (including exempt-interest dividends)
and from capital gains will be subject to, and shares of the Portfolio will be
included in the net worth of intangible property corporations for purposes of,
the Massachusetts corporation excise tax if received by a corporation subject to
such tax.
NEW YORK TAXES
Exempt-interest dividends derived from interest on tax-exempt bonds of New York
State and its political subdivisions and authorities and certain other
governmental entities (for example, U.S. possessions), paid by the Portfolio to
New York resident individuals, estates and trusts otherwise subject to these
taxes, will not be subject to New York State and New York City personal income
taxes and certain municipal tax surcharges.
Dividends, whether received in cash or additional shares, derived from the New
York Portfolio's other investment income (including interest on Tax-Exempt Bonds
other than those described in the preceding paragraph), and from the Portfolio's
net realized short-term capital gains, are taxable for New York State and New
York City personal income tax purposes as ordinary income. Tax surcharges will
also apply. Dividends derived from net realized long-term capital gains of the
Portfolio are taxable as long-term capital gains for New York State and New York
City personal income tax purposes regardless of the length of time shareholders
have held their shares.
<PAGE> 17
Dividends derived from investment income and capital gains, including exempt-
interest dividends, will be subject to the New York State franchise tax and the
New York City General Corporation Tax if received by a corporation subject to
those taxes. Certain distributions may, however, be eligible for a 50% dividend
subtraction. Shares of the Portfolio will be included in a corporate
shareholder's investment capital in determining its liability, if any, for these
taxes.
The foregoing description of Federal, State and New York City tax consequences
is based on the law currently in effect for the 1995 taxable year and is subject
to change by legislative, administrative or judicial action, which may have
prospective and/or retroactive effect.
For further information on the tax consequences of ownership of Portfolio
shares, see the Statement of Additional Information.
A PORTFOLIO MAY ADVERTISE ITS YIELD, TAX- EQUIVALENT YIELD AND TOTAL RETURN.
PERFORMANCE
Yield reflects a Portfolio's rate of income on portfolio investments as a
percentage of the Portfolio's share price. Yield is computed by annualizing the
result of dividing the net investment income per share over a 30-day period by
the maximum offering price per share on the last day of that period. Yields are
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, a Portfolio's yield may not equal the income paid
on your shares or the income reported in the Portfolio's financial statements.
Tax-equivalent yield is computed by dividing that portion of the yield of a
Portfolio which is tax-exempt by one minus a stated income tax rate and then
adding the product to any portion of the Portfolio's yield that is not
tax-exempt.
Total return is based on the overall change in value of a hypothetical
investment in a Portfolio. A Portfolio's total return shows the overall dollar
or percentage change in value, assuming the reinvestment of all dividends.
Cumulative total return shows the Portfolio's performance over a period of time.
Average annual total return shows the cumulative return divided over the number
of years included in the period. Because average annual total return tends to
smooth out variations in the Portfolio's performance, you should recognize that
it is not the same as actual year-to-year results.
Both total return and yield figures include the effect of paying the maximum
sales charge of 4.5%. Investments at a lower sales charge would achieve higher
returns than those advertised. The value of Portfolio shares, when redeemed, may
be more or less than their original cost. Both yield and total return are
historical calculations, and are not an indication of future performance.
HOW TO BUY SHARES
- ------------------------------------------------------------------------------
OPENING AN ACCOUNT.
The minimum initial investment is $1,000 ($250 for group investments).
Complete the Account application attached to this Prospectus.
- ------------------------------------------------------------------------------
BY CHECK 1. Make your check payable to John Hancock Investor Services
Corporation ("Investor Services").
2. Deliver the completed application and check to your
registered representative, Selling Broker or mail it
directly to Investor Services.
- ------------------------------------------------------------------------------
BY WIRE 1. Obtain an account number by contacting your registered
representative, Selling Broker or by calling
1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
<PAGE> 18
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Tax-Exempt Series
(Specify name of Portfolio)
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered
representative, Selling Broker or mail it directly to
Investor Services.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
BUYING ADDITIONAL SHARES.
MONTHLY AUTOMATIC 1. Complete the "Automatic Investing" and "Bank Information"
ACCUMULATION sections Account Privileges Application, designating a
PROGRAM (MAAP) bank account from which your funds may be drawn.
2. The amount you elect to invest will be automatically
withdrawn from your bank or credit union account.
- ------------------------------------------------------------------------------
BY TELEPHONE 1. Complete the "Invest-By-Phone" and "Bank Information"
sections on the Account Privileges Application
designating a bank account from which your funds may be
drawn. Note that in order to invest by phone, your
account must be in a bank or credit union that is a
member of the Automated Clearing House System (ACH).
2. After your authorization form has been processed, you may
purchase additional shares by calling Investor Services
toll-free at 1-800- 225-5291.
3. Give the Investor Services representative the name in
which your account is registered, the Fund and Portfolio
name and account number and the amount you wish to
invest.
4. Your investment normally will be credited to your account
the business day following your phone request.
- ------------------------------------------------------------------------------
BY CHECK 1. Either complete the detachable stub included in your
account statement or include a note with your investment
listing the name of the Fund and Portfolio, your account
number and the name(s) in which the account is
registered.
2. Make your check payable to John Hancock Investor Services
Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or
Selling Broker.
- ------------------------------------------------------------------------------
BY WIRE Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Tax-Exempt Series Fund
(Specify name of Portfolio)
Your Account Number
Name(s) under which account is registered
- ------------------------------------------------------------------------------
Other Requirements: All purchases must be made in U.S. dollars. Checks written
on foreign banks will delay purchases until U.S. funds are received, and a
collection charge may be imposed. Shares of the Fund are priced at the
<PAGE> 19
offering price based on the net asset value computed after John Hancock Funds
receives notification of the dollar equivalent from the Fund's custodian bank.
Wire purchases normally take two or more hours to complete and, to be accepted
the same day, must be received by 4:00 p.m., New York time. Your bank may
charge a fee to wire funds. Telephone transactions are recorded to verify
information. Certificates are not issued unless a request is made in writing
to Investor Services.
- ------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS WHICH YOU SHOULD KEEP TO HELP WITH YOUR
PERSONAL RECORDKEEPING.
You will receive a statement of your account after transactions affecting your
share balance or registration (statements related to reinvestment of dividends
and automatic investment/withdrawal plans will be sent to you quarterly). A tax
information statement will be mailed to you by January 31 of each year.
SHARE PRICE
THE OFFERING PRICE OF YOUR SHARES IS THEIR NET ASSET VALUE PLUS A SALES CHARGE.
The net asset value ("NAV") is the value of one share. The NAV per share is
calculated by dividing the Portfolio's net assets by the number of outstanding
shares. Securities in a Portfolio are generally valued by a pricing service
which utilizes electronic pricing techniques based on general institutional
trading. If no sale has occurred on the date the assets are valued, some
securities are valued at fair market value based on procedures approved by the
Trustees and for certain other securities, at amortized cost if the Trustees
determine in good faith that this cost approximates fair value as described more
fully in the Statement of Additional Information. The NAV is calculated once
daily as of the close of regular trading on the New York Stock Exchange
(generally at 4:00 p.m., New York time) on each day that the Exchange is open.
The offering price you pay for shares of a Portfolio equals the NAV plus a sales
charge, as follows:
<TABLE>
<CAPTION>
COMBINED
SALES CHARGE REALLOWANCE REALLOWANCE TO
SALES CHARGE AS A PERCENTAGE AND SERVICE FEE SELLING BROKER AS
AMOUNT INVESTED AS A PERCENTAGE OF THE AS A PERCENTAGE A PERCENTAGE OF
(INCLUDING SALES CHARGE) OF THE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE<F4> OFFERING PRICE<F1>
- ------------------------ --------------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999 3.00% 3.09% 2.50% 2.26%
$500,000 to $999,999 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over 0.00%<F2> 0.00%<F2> <F3> 0.00%<F2>
<FN>
<F1>Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales charge.
A Selling Broker to whom substantially the entire sales charge is reallowed
may be deemed to be an underwriter under the Securities Act of 1933.
<F2>No sales charge is payable at the time of purchase on investments of $1
million or more, but a contingent deferred sales charge may be imposed, in
the event of certain redemption transactions within one year of purchase.
<F3>John Hancock Funds may pay a commission and first year's service fee (as
described in <F4> below) to Selling Brokers who initiate and are responsible
for purchases of $1 million or more in the aggregate as follows: 1% on sales
to $4,999,999, 0.50% on the next $5 million and 0.25% on $10 million and
over.
<F4>At the time of sale, John Hancock Funds pays to Selling Brokers the first
</TABLE>
<PAGE> 20
year's service fee in advance in an amount up to 0.25% of the net assets
invested in the Fund. Thereafter, it pays the service fee periodically in
arrears in an amount up to 0.25% of the Fund's average annual net assets.
Selling Brokers receive the fee as compensation for providing personal and
account maintenance services to shareholders.
Sales charges ARE NOT APPLIED to any dividends which are reinvested in
additional shares of the Fund.
John Hancock Funds will pay certain affiliated Selling Brokers at an annual rate
up to 0.05% of the daily net assets of accounts attributable to these brokers.
In addition to the reallowance allowed to all Selling Brokers, John Hancock
Funds will pay round trip airfare to a resort for each registered representative
of a Selling Broker (if the Selling Broker has agreed to participate) who sells
certain amounts of John Hancock fund shares. John Hancock Funds will make these
incentive payments out of its own resources. Other than distribution fees, the
Fund does not bear distribution expenses.
Under certain circumstances described below, investors in fund shares (identical
with "Class A" shares of other John Hancock funds) may be entitled to pay
reduced sales charges. See "Qualifying for a Reduced Sales Charge."
CONTINGENT DEFERRED SALES CHARGE -- INVESTMENTS OF $1 MILLION OR MORE
Purchases of $1 million or more of Fund shares will be made at net asset value
with no initial sales charge, but if the shares are redeemed within 12 months
after the end of the calendar month in which the purchase was made (the
contingent deferred sales charge period), a contingent deferred sales charge
(CDSC) will be imposed. The rate of the CDSC will depend on the amount invested
as follows:
AMOUNT INVESTED CDSC RATE
---------------- ---------
$1 Million to $4,999,999 1.00%
Next $5 Million to $9,999,999 0.50%
Amounts of$10 Million and over 0.25%
Existing full service clients of John Hancock Mutual Life Insurance Company
group annuity contract holders as of September 1, 1994, may purchase shares with
no initial sales charge, but if the shares are redeemed within 12 months after
the end of the calendar year in which the purchase was made, a contingent
deferred sales charge will be imposed at the above rate.
The charge will be assessed on an amount equal to the lesser of the current
market value or the original purchase cost of the shares redeemed. Accordingly,
no CDSC will be imposed on increases in account value above the initial purchase
price, including any dividends which have been reinvested in additional shares.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that redemption is first of any shares in
the shareholder's account not subject to the CDSC. The CDSC is waived on
redemptions in certain circumstances. See "Waiver of Contingent Deferred Sales
Charges" below.
YOU MAY QUALIFY FOR A REDUCED SALES CHARGE ON YOUR INVESTMENT.
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in
shares of the Fund or a combination of funds in the John Hancock family of funds
(except money market funds), you may qualify for a reduced sales charge on your
investments through a LETTER OF INTENTION. You may also be able to use the
ACCUMULATION PRIVILEGE and COMBINIATION PRIVILEGE to take advantage of the value
of your previous investments in Class A shares of the John Hancock funds when
meeting the breakpoints for a reduced sales charge. For the ACCUMULATION
PRIVILEGE and COMBINATION PRIVILEGE, the applicable sales charge will be based
on the total of:
1. Your current purchase of shares of the Fund;
2. The net asset value (at the close of business on the previous day) of (a) all
shares of the Portfolio you hold, and (b) all Class A shares of any other
John Hancock mutual funds you hold; and
<PAGE> 21
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
EXAMPLE:
If you hold Class A shares of a John Hancock mutual fund with a net asset value
of $80,000 and, subsequently, invest $20,000 in shares of the Fund, the sales
charge on this subsequent investment would be 3.75% and not 4.50% (the rate that
would otherwise be applicable to investments of less than $50,000. See "Initial
Sales Charge Alternative.")
SHARES MAY BE AVAILABLE WITHOUT A SALES CHARGE TO CERTAIN INDIVIDUALS AND
ORGANIZATIONS.
If you are in one of the following categories, you may purchase shares of the
Fund without paying a sales charge:
* A Trustee or officer of the Fund; a Director or officer of the Adviser and its
affiliates or Selling Brokers; employees or sales representatives of any of
the foregoing; retired officers, employees or Directors of any of the
foregoing; a member of the immediate family of any of the foregoing; or any
fund, pension, profit sharing or other benefit plan for the individuals
described above.
* Any state, county, city or any instrumentality, department, authority, or
agency of these entities which is prohibited by applicable investment law from
paying a sales charge or commission when it purchases shares of any registered
investment management company.*
* A bank, trust company, credit union, savings institution or other depository
institution, its trust department or its common trust funds if it is
purchasing $1 million or more for non-discretionary customers or accounts.*
* A broker, dealer or registered investment adviser that has entered into an
agreement with John Hancock Funds providing specifically for the use of Fund
shares in fee-based investment products made available to their clients.
* A former participant in an employee benefit plan with John Hancock Mutual
Funds, when he/she withdraws from his/her plan and transfers any or all of
his/her plan distributions directly to the Fund.
- ---------
*For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Shares of the Fund may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
UNDER CERTAIN CIRCUMSTANCES, THE CDSC ON SHARE REDEMPTIONS WILL BE WAIVED.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES. The CDSC will be waived on
redemptions of shares that are subject to a CDSC, unless indicated otherwise,
in the circumstances defined below:
* Redemptions of shares made under a Systematic Withdrawal Plan (see "How to
Redeem Shares"), as long as your annual redemptions do not exceed 10% of your
account value at the time you established your Systematic Withdrawal Plan and
10% of the value of subsequent investments (less redemptions) in that account
at the time you notify Investor Services. This waiver does not apply to
Systematic Withdrawal Plan redemptions of shares that are subject to a CDSC.
* Redemptions made to effect distributions from an Individual Retirement Account
either before or after age 59 1/2, as long as the distributions are based on
your life expectancy or the joint-and-last survivor life expectancy of you and
your beneficiary. These distributions must be free from penalty under the
Code.
* Redemptions made to effect mandatory distributions under the Code after age 70
1/2 from a tax-deferred retirement plan.
* Redemptions made to effect distributions to participants or beneficiaries from
certain employer-sponsored retirement plans including those qualified under
<PAGE> 22
Section 401(a) of the Code, custodian accounts under Section 403(b)(7) of the
Code and deferred compensation plans under Section 457 of the Code. The waiver
also applies to certain returns of excess contributions made to these plans.
In all cases, the distributions must be free from penalty under the Code.
* Redemptions due to death or disability.
* Redemptions made under the Reinvestment Privilege, as described in "Additional
Services and Programs" of this Prospectus.
* Redemptions made pursuant to the Fund's right to liquidate your account if you
own fewer than 50 shares.
* Redemptions made in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions from certain IRA and retirement plans which purchased shares prior
to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION REQUEST, PLEASE FOLLOW THESE PROCEDURES.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. A
Portfolio may withhold payment until reasonably satisfied that investments which
were made by check or Invest-by-Phone have been collected (which may take up to
10 calendar days).
Once your shares are redeemed, the applicable Portfolio generally sends you
payment on the next business day. When you redeem them, you will generally
realize a gain or loss depending generally on the difference between what you
paid for your shares and what you receive for them, subject to tax rules. Under
unusual circumstances, the Portfolio may suspend redemptions or postpone payment
for up to seven days or longer, as permitted by Federal securities laws.
- ------------------------------------------------------------------------------
BY TELEPHONE All Fund shareholders are automatically eligible for the
telephone redemption privilege. Call 1-800-225- 5291,
from 8:00 A.M. to 4:00 P.M. (New York Time), Monday
through Friday, excluding days on which the New York
Stock Exchange is closed. Investor Services employs the
following procedures to confirm that instructions
received by telephone are genuine. Your name, the account
number, taxpayer identification number applicable to the
account and other relevant information may be requested.
In addition, telephone instructions are recorded.
You may redeem up to $100,000 by telephone, but the
address on the account must not have changed for the last
30 days. A check will be mailed to the exact name(s) and
address shown on the account.
If reasonable procedures, such as those described above,
are not followed, the Fund may be liable for any loss due
to unauthorized or fraudulent telephone instructions.
Neither the Fund nor Investor Services will be liable for
any loss or expense for acting upon telephone
instructions made in accordance with the telephone
transaction procedures mentioned above.
Telephone redemption is not available for shares of the
Fund that are in certificate form.
During periods of extreme economic conditions or market
changes, telephone requests may be difficult to implement
due to a large volume of calls. During these times you
should consider placing redemption requests in writing or
<PAGE> 23
using EASI-Line. The EASI-Line telephone number is
1-800-338-8080.
- ------------------------------------------------------------------------------
BY WIRE If you have a telephone redemption form on file
with the Fund, redemption proceeds of $1,000 or more can
be wired on the next business day to your designated bank
account and a fee (currently $4.00) will be deducted. You
may also use electronic funds transfer to your assigned
bank account and the funds are usually collectable after
two business days. Your bank may or may not charge a fee
for this service. Redemptions of less than $1,000 will be
sent by check or electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
attached to the Prospectus.
- ------------------------------------------------------------------------------
IN WRITING Send a stock power or letter of instruction specifying
the name of the Fund and Portfolio, the dollar amount or
the number of shares to be redeemed, your name, your
account number, and the additional requirements listed
below that apply to your particular account.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
TYPE OF REGISTRATION REQUIREMENTS
-------------------- ------------
Individual, Joint Tenants, Sole A letter of instruction signed (with titles
Proprietorship, Custodial where applicable) by all persons authorized
(Uniform Gifts or Transfer to to sign for the account, exactly as it is
Minors Act), General Partners. registered with the signature(s) guaranteed.
Corporation, Association A letter of instruction and a corporate
resolution, signed by person(s) authorized
to act on the account with the signature(s)
guaranteed.
Trusts A letter of instruction signed by the
Trustee(s) with the signature guaranteed.
(If the Trustee's name is not registered
on your account, also provide a copy of the
trust document, certified within the last 60
days.)
If you do not fall into any of these registration categories please call
1-800-225-5291 for further instructions.
- ------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR SIGNATURE.
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the on your request. It may not be provided by a notary public. If
the net asset value of the shares redeemed is $100,000 or less, John Hancock
Funds may guarantee the signature. The following institutions may provide you
with a signature guarantee, provided that any such institution meets credit
standards established by Investor Services: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or meets certain net
capital requirements; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v)
a national securities exchange, a registered securities exchange or a clearing
agency.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT REDEMPTIONS.
THROUGH YOUR BROKER Your broker may be able to initiate the redemption.
Contact your instructions.
- ------------------------------------------------------------------------------
If you have certificates for your shares, you must submit them with your stock
<PAGE> 24
power or a letter of instruction. You may not redeem certificated shares by
telephone.
Due to the proportionately high cost of maintaining small accounts, the Fund
reserves the right to redeem at net asset value all shares in an account which
holds fewer than 50 shares (except accounts under retirement plans) and to
mail the proceeds to the shareholder or the transfer agent may impose an
annual fee of $10.00. No CDSC will be imposed on involuntary redemptions of
shares.
Shareholders will be notified before these redemptions are to be made or this
fee is imposed and will have 30 days to purchase additional shares to bring
their account up to the required minimum. Unless the number of shares acquired
by further purchases and dividend reinvestments, if any, exceeds the number of
shares redeemed, repeated redemptions from a smaller account may eventually
trigger this policy.
- ------------------------------------------------------------------------------
ADDITIONAL SERVICES AND PROGRAMS
YOU MAY EXCHANGE SHARES OF THE PORTFOLIOS ONLY FOR CLASS A SHARES IN ANOTHER
JOHN HANCOCK FUND.
EXCHANGE PRIVILEGE
If your investment objective changes, or if you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of the Fund
only for shares of the same class of another John Hancock fund. For this
purpose, shares of John Hancock funds with only one class of shares will be
treated as Class A whether or not they have been so designated.
Exchanges between funds which are not subject to a CDSC are based on their
respective net asset values. No sales charge or transaction charge is imposed.
Shares of a Portfolio which are subject to a CDSC (see discussion under the
caption "Share Price") may be exchanged into another John Hancock fund at net
asset value without incurring the CDSC; however, the shares acquired in an
exchange may be subject to a CDSC upon redemption. For purposes of computing the
CDSC payable upon redemption of shares acquired in an exchange, the holding
period of the original shares is added to the holding period of the shares
acquired in an exchange.
The Portfolios reserve the right to require you to keep previously exchanged
shares (and reinvested dividends) in a Portfolio for 90 days before you are
permitted to execute a new exchange. The Portfolios may also terminate or alter
the terms of the exchange privilege, upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares in another for Federal income tax purposes. An exchange may
result in a gain or loss.
When you make an exchange, your account registration must be identical in both
the existing and new account. The exchange privilege is available only in states
where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
Accounts under common control or ownership will be aggregated for this purpose.
Although the Fund will attempt to give you prior notice whenever it is
<PAGE> 25
reasonably able to do so, it may impose these restrictions at any time.
BY TELEPHONE
1. When you fill out the application for your purchase of shares of a Portfolio,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to authorize telephone exchange.
2. Call 1-800-225-5291. Have the account number of your current fund and the
exact name in which it is registered available to give to the telephone
representative.
IN WRITING
1. In a letter, request an exchange and list the following:
-- name of the Portfolio whose shares you currently own
-- your account number
-- name(s) in which the account is registered
-- name of the Portfolio or Fund in which you wish your exchange to be
invested
-- the number of shares, all shares or the dollar amount you wish to exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
IF YOU REDEEM SHARES OF A PORTFOLIO, YOU MAY BE ABLE TO REINVEST THE PROCEEDS IN
THESE PORTFOLIOS OR ANOTHER JOHN HANCOCK FUND WITHOUT PAYING AN ADDITIONAL SALES
CHARGE.
REINVESTMENT PRIVILEGE
1. You will not be subject to a sales charge on investing the proceeds of a
redemption of shares of the Portfolios in any John Hancock funds that are
otherwise subject to a sales charge, as long as you reinvest within 120 days
from the redemption date. If you paid a CDSC upon a redemption, you may
reinvest at net asset value in the same class of shares from which you
redeemed within 120 days. Your account will be credited with the amount of
the CDSC previously charged, and the reinvested shares will continue to be
subject to a CDSC. For purposes of computing the CDSC payable upon a
subsequent redemption, the holding period of the shares acquired through
reinvestment will include the holding period of the redeemed shares.
2. Any portion of the redemption may be reinvested in shares of a Portfolio or
in any of the other John Hancock mutual funds, subject to the minimum
investment limit in any fund.
3. To reinvest, you must notify Investor Services in writing. Include the
Portfolio name and account number from which your shares were originally
redeemed.
YOU CAN PAY ROUTINE BILLS FROM YOUR ACCOUNT OR MAKE PERIODIC DISBURSEMENTS FROM
YOUR RETIREMENT ACCOUNT TO COMPLY WITH IRS REGULATIONS.
SYSTEMATIC WITHDRAWAL PLAN
1. You may elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain the application from your registered representative or by calling
1-800- 225-5291.
2. To be eligible, you must have at least $5,000 in your account.
3. Payments from your account can be made monthly, quarterly, semi-annually, on
a selected month basis or annually to yourself or any other designated payee.
<PAGE> 26
4. There is no limit on the number of payments you may authorize, but all
payments must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional shares, because you may be subject to initial
sales charges on your purchases. In addition, your redemptions are taxable
events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks or if deposits to a bank account are returned for any reason.
YOU CAN MAKE AUTOMATIC INVESTMENTS AND SIMPLIFY YOUR INVESTING.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
1. You may authorize an investment to be automatically drawn each month from
your bank for investment in Portfolio shares under the "Automatic Investing"
and "Bank Information" Sections of the Account Privileges
Application.
2. You may also authorize automatic investment through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
3. You may terminate your Monthly Automatic Accumulation Program at any time.
4. There is no additional charge to you for this program, and there is no cost
to the Portfolios.
5. If you have payments being withdrawn from a bank account and we are notified
that the account has been closed, your withdrawals will be discontinued.
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS MAY ESTABLISH ACCOUNTS.
GROUP INVESTMENT PROGRAM
1. An individual account will be established for each participant, but the sales
charge will be based on the aggregate dollar amount of all participants'
investments. To determine how to qualify for this program, contact your
registered representative or call 1-800-225-5291.
2. The initial aggregate investment of all participants in the group must be at
least $250.
3. There is no additional charge for this program. There is no obligation to
make investments beyond the minimum, and you may terminate the program at any
time.
APPENDIX
As described in the Prospectus, the Portfolios may invest in Tax-Exempt bonds in
the lower rating categories (that is, rated Baa or Ba by Moody's or BBB or BB by
Standard & Poor's, or BBB or BB by Fitch).
Moody's describes its lower rating categories for tax-exempt bonds as follows:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Standard & Poor's describes its lower rating categories for tax-exempt bonds as
follows:
Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
<PAGE> 27
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Debt rated "BB" is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. While this debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Fitch describes its lower rating categories for tax-exempt bonds as follows:
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
Plus (+) or Minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
Moody's describes its two highest ratings for commercial paper as follows:
Issuers rated P-1 (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations. Issuers rated P-2 (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Ratings for state and municipal notes and other short-term obligations will be
designated Moody's Investment Grade ("MIG").
MIG-1 Notes bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2 Notes bearing this designation are of high quality with margins of
protection ample although not so large as in the preceding group.
Standard & Poor's describes its two highest ratings for commercial paper as
follows:
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
Fitch describes its two highest ratings for commercial paper as follows:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
<PAGE> 28
<TABLE>
JOHN HANCOCK TAX-EXEMPT SERIES FUND
For the year ended August 31, 1994 the quality distribution of each Portfolio
was as follows:
CALIFORNIA PORTFOLIO
- --------------------
<CAPTION>
RATING RATING
% OF ASSIGNED % OF ASSIGNED % OF
QUALITY DISTRIBUTION VALUE PORTFOLIO BY ADVISER PORTFOLIO BY SERVICE PORTFOLIO
- -------------------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA $15,301,079 31.47% 0 0.0% $15,301,079 31.47%
AA 10,309,490 21.21 0 0.0 10,309,490 21.21
A 12,592,430 25.90 0 0.0 12,592,430 25.90
BAA 8,007,822 16.47 0 0.0 8,007,822 16.47
BA 0 0.00 0 0.0 0 0.00
B 0 0.00 0 0.0 0 0.00
Debt-Unrated 1,247,932 2.57 0 0.0 1,247,932 2.57
----------- ------ - --- ----------- -----
Debt Securities 47,458,753 97.62 0 0.0 $47,458,753 97.62%
- --- ----------- -----
Equity Securities 0 0.00
Short-Term Securities 1,154,881 2.38
----------- ------
Total Portfolio $48,613,634 100.00%
=========== ======
</TABLE>
MASSACHUSETTS PORTFOLIO
- -----------------------
<TABLE>
<CAPTION>
RATING RATING
% OF ASSIGNED % OF ASSIGNED % OF
QUALITY DISTRIBUTION VALUE PORTFOLIO BY ADVISER PORTFOLIO BY SERVICE PORTFOLIO
- -------------------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA $15,192,841 28.53% 0 0.0% $15,192,841 28.53%
AA 7,370,450 13.84 0 0.0 7,370,450 13.84
A 21,336,203 40.06 0 0.0 21,336,203 40.06
BAA 8,325,205 15.63 0 0.0 8,325,205 15.63
BA 0 0.00 0 0.0 0 0.00
B 0 0.00 0 0.0 0 0.00
Debt-Unrated 281,538 0.53 0 0.0 281,538 0.53
----------- ----- - --- ----------- ----
Debt Securities 52,506,237 98.59 0 0.0 $52,506,237 98.59%
- --- ----------- -----
Equity Securities 0 0.00
Short-Term Securitie 752,359 1.41
----------- ------
Total Portfolio $53,258,596 100.00%
=========== ======
</TABLE>
<TABLE>
NEW YORK PORTFOLIO
- ------------------
<CAPTION>
RATING RATING
% OF ASSIGNED % OF ASSIGNED % OF
QUALITY DISTRIBUTION VALUE PORTFOLIO BY ADVISER PORTFOLIO BY SERVICE PORTFOLIO
- -------------------- ----------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA $13,972,466 25.38% 0 0.0% $13,972,466 25.38%
AA 12,295,339 22.33 0 0.0 12,295,339 22.33
A 11,626,528 21.12 0 0.0 11,626,528 21.12
BAA 13,799,499 25.06 0 0.0 13,799,499 25.06
BA 2,513,530 4.57 0 0.0 2,513,530 4.57
B 0 0.00 0 0.0 0 0.00
Debt-Unrated 0 0.00 0 0.0 0 0.00
----------- ------ - --- ----------- -----
Debt Securities 54,207,362 98.46 0 0.0 $54,207,362 98.46%
- --- ----------- -----
Equity Securities 0 0.00
Short-Term Securities 849,627 1.54
----------- ------
Total Portfolio $55,056,989 100.00%
=========== ======
</TABLE>
<PAGE> 29
JOHN HANCOCK TAX-EXEMPT SERIES FUND
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INDEPENDENT AUDITORS
Price Waterhouse LLP
160 Federal Street
Boston, Massachusetts 02110
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For: Service Information
Telephone Exchange call 1-800-225-5291
Investment-by-Phone
Telephone Redemption
TDD call 1-800-554-6713
JHD-6300P 1/95
JOHN HANCOCK
TAX-EXEMPT
SERIES FUND --
CALIFORNIA PORTFOLIO
MASSACHUSETTS PORTFOLIO
NEW YORK PORTFOLIO
PROSPECTUS
JANUARY 1, 1995
FOR INVESTORS SEEKING TO ACHIEVE CURRENT INCOME EXCLUDABLE FROM GROSS INCOME FOR
FEDERAL INCOME TAX PURPOSES AND EXEMPT FROM THE PERSONAL INCOME TAX OF
CALIFORNIA, MASSACHUSETTS OR NEW YORK STATE AND NEW YORK CITY, CONSISTENT WITH
PRESERVATION OF CAPITAL.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
TELEPHONE 1-800-225-5291
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